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

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.