GARP SCR- Chapter 3: Climate Change Risk

Transition Risk:

Transition risks are the financial and operational risks that arise from the process of shifting to a low-carbon economy. They emerge as governments, markets, and society respond to climate change through policy changes, technology shifts, market dynamics, and evolving consumer preferences

Policy and Legal Risks:

Policy and legal risks are a subcategory of transition risks. They arise when new climate-related laws, regulations, or litigation impact how companies operate, invest, or disclose information.

Policy Risks:
- Changes in climate policy (e.g., carbon taxes, emission trading schemes, renewable energy mandates).
- Stricter building codes or energy efficiency standards.
- Subsidy shifts (e.g., phasing out fossil fuel subsidies, promoting EV incentives).
Legal Risks:
- Rising climate-related lawsuits against companies, directors, or governments.
- Liability for damages caused by greenhouse gas emissions or greenwashing.
- Mandatory disclosure rules (e.g., TCFD-aligned reporting, SEC climate disclosures).

A government mandates the early shutdown of a coal-fired power plant, even though it was originally approved to operate for another 15 years.
What type of risk does this represent, and why?

An NGO sues a utility company for planning to build a €1.2 billion coal plant without considering climate-transition risks in its decision-making process
( ClientEarth vs. Enea ).
What type of risk is this and what does it show about evolving climate litigation?

A Peruvian farmer sues German utility RWE, claiming that its historical greenhouse gas emissions contributed to the melting of glaciers threatening his village (Lliuya vs. RWE).
What kind of risk does this illustrate, and why is it significant?