Risk classes of superclass S4 - Regulators

SR 4.1 Regulatory risk:

Changes in regulations or legislation can affect a company or industry as companies are required to abide by governing regulations. Regulations can increase operational costs, introduce legal and administrative hurdles, and sometimes even restrict a company from doing business (CFI, 2020).

SR 4.1.1 Climate-related (Transition risk):

(Financial) Risks to companies and sectors resulting from the global shift to a low-carbon future. The TCFD (2020) framework identifies four types of Transition risks, namely: policy and legal changes, reputation impacts, and shifts in market preferences and technology. This includes the creation of taxes based on the carbon emissions and carbon intensity of the activity, as well as caps on service provision or production (mandatory shutdowns, ban on capacity addition). This could include scope 1 and 2 but also scope 3 of assets depending on the nature of the activity and the objective of the regulator to manage demand. As a result, infrastructure assets could become stranded or there could be an uncertain subsidy landscape, changing with technological advancements. This increases uncertainty and can put the financial viability of certain projects at risk (e.g., renewable energy projects).

SR 4.1.2 Not climate-related:

Poor performance on the part of infrastructure companies can pose the risk of intervention from government and regulators which can manifest in the form of fines, nationalisation (where applicable) and business closure.

_{CFI (2020). Regulatory risk: Risk imposed by changes from governing bodies. Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/finance/regulatory-risk/}

_{TCFD (2020). Task force on climate-related financial disclosures—2020 status report.}