The Journal of Sustainable Finance & Investment has published new research from Scientific Climate Indices, an EDHEC venture, “Beyond carbon price: a scenario-based quantification of portfolio financial loss from climate transition risks”, addressing climate transition risks in portfolio management by introducing a model that integrates firm-specific ‘green’ revenues, aligned with the European taxonomy, with economic and energy variables from adverse transition scenarios.

Climate transition risks, arising from shifts in policies, technological advancements, and evolving consumer preferences, pose significant challenges for financial portfolios. Existing stress-testing approaches largely focus on carbon pricing and short-term cost shocks, overlooking longer-term demand-side risks that affect firm revenues. This paper advances the literature in two ways. First, it introduces a framework linking firm-level transition-sensitive revenues and carbon intensity to macroeconomic and energy variables from long-term transition scenarios, thereby capturing both cost and revenue transmission channels and enabling the computation of a Conditional Transition Loss metric. Second, it assesses how estimated losses vary with scenario narratives, time horizons, and modelling assumptions. Applied to 1,287 MSCI World firms, the model yields portfolio losses between 0.5% and 6%, and up to 60% in sectors such as Utilities. Three insights emerge: demand-side effects are as material as carbon pricing; substantial within-sector heterogeneity implies potential winners; and scenario uncertainty significantly shapes loss magnitudes

“Carbon intensity and transition risk are often treated as interchangeable concepts by investors. In reality, carbon intensity captures only one dimension of transition risk. This paper demonstrates that firms with similar emissions profiles can experience markedly different transition losses once demand shifts under transition scenarios are taken into account. These findings have direct practical implications for portfolio construction, highlighting that effective transition-risk management requires moving beyond emissions-based screening toward a granular, firm-level assessment of cash-flow sensitivities to climate transition pathways.”
Vincent Bouchet, Director of ESG & Climate Research, Scientific Climate Indices

“Transition risk is shown to operate mainly through revisions in expected revenues rather than through isolated cost shocks, calling into question the use of carbon intensity as a sufficient indicator of exposure to transition risk.”
Thomas Lorans, Senior Research Engineer, EDHEC Climate Institute

Get access to the full version of the paper, published in the Journal of Sustainable Finance & Investment

Beyond carbon price: a scenario-based quantification of portfolio financial loss from climate transition risks