Transition risk
Transition risk is exposure to policy, legal, technology, market, or reputation changes arising during the shift toward a lower-carbon economy. Applying Transition risk requires a stated reporting boundary, decision user, financial instrument, materiality lens, and governance responsibility. Those choices determine how Transition risk can be compared or acted upon.
In simple terms
In practical use, Transition risk is exposure to policy, legal, technology, market, or reputation changes arising during the shift toward a lower-carbon economy. For Transition risk, assessment should identify the driver, exposure, affected people or assets, likelihood, consequence, and available response within a declared reporting boundary, decision user, financial instrument, materiality lens, and governance responsibility. Transition risk connects with Environmental, social and governance and IFRS S2; each can affect its application without sharing its definition. The candidate link between Transition risk and Enterprise value materiality remains a separate expansion question supported here by IFRS Foundation.
Why it matters
Transition risk matters because decisions about it determine what enters a disclosure or transaction, which decision user it serves, and who is accountable for supporting evidence. A defensible use of Transition risk therefore exposes its boundary, method, evidence, responsible actor, and uncertainty before a conclusion is accepted. That discipline keeps Environmental, social and governance and IFRS S2 from being treated as proof of Transition risk when their criteria, scope, or results differ.
Example
A reporting and finance team evaluates Transition risk for a defined decision and records the relevant reporting boundary, decision user, financial instrument, materiality lens, and governance responsibility. For Transition risk, the team uses cited material from IFRS Foundation to identify the exposure, affected people or assets, and available response, documenting the period, data, assumptions, and comparison with Environmental, social and governance. It treats IFRS S2 and Enterprise value materiality as separate questions rather than proxies for Transition risk.
How it differs
Climate-related risks and opportunities
Transition risk concerns exposure created by economic and societal adjustment, whereas Climate-related risks and opportunities also include physical hazards and potential benefits. A sound assessment identifies the particular policy, legal, technology, market, or reputation driver.