The risk everyone sees - and the one many miss

When people think about the risks of the climate and nature crisis, they usually picture the physical ones. Floods that damage factories, heatwaves that disrupt supply chains, droughts that drive up costs, and biodiversity loss that undermines agricultural production. These are visible and tangible, which is why they dominate the conversation. Yet there is another class of risks that are less obvious, but equally powerful in shaping the fortunes of businesses: transition risks.

What we mean by transition risk

Transition risks are the risks that arise not from the physical changes in the environment, but from the way society, governments, markets and communities respond to those changes. They are the consequences of the world attempting to transition to a lower-carbon and more nature-positive model of growth. Governments introduce new rules and incentives. Investors, insurers and lenders change the conditions under which they provide capital. New technologies alter cost curves and redefine what counts as competitive advantage. Customers and communities raise their expectations, and reputational shocks follow quickly when those expectations are not met. Transition risks reshape the environment in which a business operates every bit as much as a flood or fire does, and sometimes with even greater speed.

Board-level stakes, not a sustainability side-quest

Transition risks belong at the heart of enterprise risk management, but it is too common that they are a concern chiefly for the sustainability team. Transition risks should be a concern of chief executives and finance directors, because they affect earnings, growth, capital costs and supply chains. They should matter to risk committees, because they change the probability and severity of exposures that cascade through a business. A new policy does not merely create an environmental compliance issue: it can close markets, reduce revenues, strand assets and alter the cost of capital. A rapid shift in consumer preference does not merely affect branding: it can dictate whether a product line remains viable.

The four forces driving transition risk

At refinq, we describe these risks as being driven by four forces: policy and regulatory developments, market shifts, technological change, and reputational pressure. Each of these forces operates on different timescales. Some are immediate, such as a requirement that comes into effect next quarter. Others are medium-term, such as a sectoral standard that steadily becomes a condition of doing business. And some are longer-term, such as the maturing of technologies that gradually alter the cost structure of entire industries. What unites them is that they do not wait for the annual sustainability report to be written. They move continually, and they demand to be monitored in the same living way.

Static reports date fast

The traditional approach has been to hire consultants to produce a report. A team arrives, gathers information, interviews staff, and produces a document that describes the risks as they appear at that point in time. The results may be insightful, but they are also expensive and, more importantly, static. The moment a policy shifts or an investor statement reshapes expectations, the risk map begins to date. Six months later the board is already operating with partial information. To stay current, the exercise has to be repeated again and again, with high cost and significant time lost.

From snapshots to a living risk map

This is where artificial intelligence offers something new. Generative AI, when deployed responsibly, can continuously scan the landscape of regulatory change, market signals, technology trends and shifts in reputation. It can map those signals directly to the footprint of a specific business: its assets, its operations, its supply chains and its jurisdictions. It can maintain a consistent framework across multiple divisions and geographies. It can create an audit trail that links each identified risk back to a live source, making the output traceable and verifiable. In short, AI makes it possible to replace a static snapshot with a living map of transition risks.

Where AI helps—and where humans must lead

But it is important to be clear: you cannot simply paste a headline or report into a chatbot and expect to receive a reliable analysis of transition risks. The outputs of general-purpose models can be shallow, misleading or simply wrong. (I write this after a long period of dedicated prompt engineering!). The outputs either lack the specificity that is needed for board-level decision making, or go into a level of detail that exposes fundamental errors. That is why human expertise remains indispensable.

Experts are required to verify which policy and regulatory shifts are genuinely significant, to interpret how technology trends may affect competitiveness, to assess whether market movements are structural or temporary, and to ensure reputational signals are relevant to the company in question. They are needed to connect the risks to the actual business functions, contracts and suppliers that matter, and to align them with the company’s strategic priorities and values. AI provides the scale and speed, but humans provide the judgement, credibility and, most importantly, broader contextual understanding. The combination is where the magic is, because this is what makes the results robust enough to support decisions by a board, an investor or a risk committee.

How refinq operationalizes transition risk refinq’s transition risk analysis process has been designed around this principle. It combines generative AI with expert oversight to produce a risk map that is comprehensive, time-sensitive and tailored. We consider the four major drivers of transition risk: policy and regulatory, market, technological and reputational. Our approach projects those risks across short, medium and long horizons, recognising that some shocks arrive overnight while others accumulate slowly. Most importantly, it ties the risks directly to the business itself, rather than to a generic sector template. Will full automation come? I genuinely think it will and the refinq team are building the pipelines for it, but for now we want to provide the level of detail that requires that human-in-the-loop working with the AI. Every risk is grounded in verifiable sources and reviewed by specialists, so that the results are credible and decision-ready. And it is important to stress that this is not legal advice. We do not provide opinions on how you should comply with specific laws. What we provide is a structured, expert-governed map of the transition risks that your business faces, which your legal, finance and risk teams can then act upon.

From compliance to capital allocation

The magnitude of global change is clear. The world is not only experiencing more floods, fires and droughts; it is also remaking the rules of the economy in response. Transition risks are accelerating, and the businesses that treat them as a compliance exercise will struggle to keep up. Those that embed them into core enterprise risk management, keep them live and current, and integrate them into capital and procurement decisions will be better placed to adapt and thrive.

Bottom line

The need is clear: corporates need a vision of transition risks that is both living, credible, and that helps boards make decisions with confidence. At refinq, we satisfy this need.

References:

• KPMG – Climate-related Transition Risks: Meeting the Challenge

• Corporate Finance Institute (CFI) – What are Transition Risks & Climate Risks?

• TCFD Knowledge Hub – Transition Risk Framework (Cambridge Institute/ClimateWise)

• Deloitte / Wall Street Journal – Making the Business Case for Sustainability

• AP News – More CEOs Fear Their Companies Won’t Survive 10 Years as AI and Climate Challenges Grow

• Nature Climate Change – Near-term Transition and Longer-term Physical Climate Risks of Greenhouse Gas Emissions Pathways