Single Event Transition Risk: A Measure for Long Term Carbon Exposure

TL;DR

This paper introduces the Single Event Transition Risk (SETR), a new measure to quantify long-term carbon transition risk for investors, addressing the limitations of current metrics like emissions data and ESG scores.

Contribution

It defines SETR as a novel framework for approximating a company's exposure to low-carbon transition risks and discusses its potential applications and future extensions.

Findings

SETR provides a quantifiable measure of transition risk.

The framework can estimate share price exposure to low-carbon transition.

Potential for extending the model to multiple transition events.

Abstract

Although there is a growing consensus that a low-carbon transition will be necessary to mitigate the accelerated climate change, the magnitude of transition-risk for investors is difficult to measure exactly. Investors are therefore constrained by the unavailability of suitable measures to quantify the magnitude of the risk and are forced to use the likes of absolute emissions data or ESG scores in order to manage their portfolios. In this article, we define the Single Event Transition Risk (SETR) and illustrate how it can be used to approximate the magnitude of the total exposure of the price of a share to low-carbon transition. We also discuss potential applications of the single event framework and the SETR as a risk measure and discuss future direction on how this can be extended to a system with multiple transition events.