What are physical and transition risks, and how do they relate to carbon emissions?

Answer

Carbon emissions are the main driver of climate change, raising the global mean temperature and increasing the frequency and intensity of hazard events. These represent risks of physical damage to assets, known as “physical risks.”  

One of the main solutions that have been proposed and partially implemented to contain climate change is to impose a carbon tax to incentivize companies to reduce their carbon footprint. This tax represents a risk for companies, particularly those heavily emitting carbon. Those risks are called “transition risks.”