When the Centre for Risk Studies at Cambridge Judge Business School embarked on a new classification system for climate transition risks, there were a couple of possible approaches: to focus more narrowly on policy, legal and market risks during the period of transition to a lower-carbon economy, or to also examine physical risks such as flooding from climate change and infrastructure damage from earthquakes.
The decision to choose the latter route for the Taxonomy reflects the broad-based approach of the Centre, whose research on various topics helps businesses and policymakers navigate uncertain times through knowledge on – in the words of the late US Defence Secretary Donald Rumsfeld – known and unknown unknowns about climate change, cybersecurity, migration and a host of other pressing issues.
Why physical risks matter in climate transition planning
“For this Taxonomy, a broader systemic approach that includes physical risks was needed to reflect the challenging transition that businesses and all of us must face,” says Daniel (Danny) Ralph, Professor of Operations Research at Cambridge Judge and Academic Director of the Centre for Risk Studies.
“We realised immediately that transition risks such as legal, technological and reputational issues, which pose very real threats to businesses, were much more uncertain in the short term than physical risks. So we needed call out all potential risks accompanying this transition, and then, study how they combine. For example, physical risks could be catalysts to accelerate the transition to low carbon and, at the same time, they could aggravate other transition risks such as disintegration of trust between populations and governments, or geopolitical conflict over resources. Businesses need to have all these factors at their fingertips in order to chart the best path – and providing such broad-based knowledge along with deep dives into specific issues and contexts has been the hallmark of the Risk Centre since its inception in 2009.”
Cambridge Centre for Risk Studies: helping organisations manage systemic risks in a volatile world
“We launched the Risk Centre to tackle systemic risks by giving managers frameworks and tools for recognising that they operate in a very noisy world: you don’t have a choice when it comes to dealing with shocks from outside your organisation. Along the way we have worked with companies, governments, non-profit organisations and other groups to develop insight and practical measures to help weigh risks and rewards, and showcase how organisational objectives and societal impacts are related. Those impacts are in areas such as the environment, societal expectations and international relations. Going forward, we are focussing as much on longer term trends, associated with emerging risks, as we are on systemic shocks. Climate change and geopolitics are 2 areas where trends and shocks are pretty intertwined.”
So the Centre for Risk Studies, supported by AXA XL and the AXA Research Fund, developed a framework that includes physical and other risks. This is designed to help companies categorise all risks as a first step toward prioritising those that are most critical to their businesses, and develop plans on how to minimise such risks and respond vigorously should such risks become reality.
The Taxonomy produced with the support of AXA is part of the Cambridge Systemic Risks Hub (CSRH), a collaboration between the Cambridge Centre for Risk Studies and partners interested in the impact of systemic threats on the business community. Climate transition risk is one of the CSRH’s research pillars. Others include digital technology risk and geopolitical risk.
Inaction will not solve risks posed by lower-carbon transition
“I very much like John F. Kennedy’s statement from 1961: ‘There are risks and costs to action, but they are far less than the long-range risks of comfortable inaction,’” says the lead researcher on the Climate Transition Risk project, Dr Fernanda Lammoglia. “It highlights the risk of conducting business as usual and the action bias for a long-term strategy.”
The Centre took such advice to heart in compiling the Taxonomy, as the framework aims to help firms develop a long-term vision and approach to the lower-carbon transition. In so doing, the Centre uses these broad definitions of risk based on the academic literature in this area:
- systemic risks: “the risk of a breakdown of an entire system rather than simply the failure of individual parts”
- physical risks: “risks resulting from climate change can be event-driven (acute) or longer-terms shifts (chronic) in climate patterns”
- transition risks: “potential costs to society of evolving to a low carbon economy to mitigate climate change”
Cambridge Taxonomy of Climate Transition Risks: 6 classes of risk
The Taxonomy is divided into 6 main classes of risk.
1
Financial risks
Economies heavily reliant on fossil fuels face complex macroeconomic challenges and trading conditions that could be influenced by carbon markets and tariffs.
2
Geopolitical risks
These include navigating a shortage of green-skilled workers, supply chain vulnerabilities and the potential that renewal energy projects could face shutdowns due to security concerns.
3
Technology risks
While advances in solar and wind energy have helped quicken the lower-carbon transition, there are heightened cybersecurity risks to infrastructure and critical systems, while (reflecting the Taxonomy’s inclusion of physical risks) “shifting weather patterns can lead to industrial accidents and costly damage to property and infrastructure”.
4
Environmental risks
These include increased severity and frequency of extreme weather events that pose risks to physical infrastructure and create high-risk zones, affecting insurance markets. “Rising temperature bring unique operational challenges, while environmental degradation and resource scarcity threaten food, water and energy security.”
5
Social risks
The success of lower-carbon transition models will depend heavily on managing the social costs of adjustment. These risks include a shortage of skilled workers, labour disputes and the adaptation of healthcare and social care systems to warmer conditions caused by climate change.
6
Governance risks
There are risks as non-compliance with existing or emerging climate-change regulations or accounting standards could be very costly to firms.
Cambridge framework helps firms navigate 141 transition risks
Each of these 6 classes then contains families and types of risk, so in all there are 141 climate transition risks arranged in a hierarchical fashion so businesses can set priorities based on this interplay of risks outlined in the Taxonomy.
“One example we identified focuses on how businesses and other organisations can use this broad range of risk categories to identify blind spots in their transition-related strategies,” says Fernanda, Research Associate at the Centre for Risk Studies. “This allows firms to identify roles and leverage points, make decisions on systemic risk mitigation, and also identify opportunity areas for their business.” Such opportunities during the lower-carbon transition include resource and distribution efficiency, low-emission energy products and capitalising on shifts in consumer preference.
Looking more closely at some of the Taxonomy’s framework, the Environmental class of risk, for example, includes 6 families:
- extreme weather
- geophysical
- climate change
- environmental degradation
- natural resource deficiency
- food security
Physical risks identified within those families include tropical windstorms, earthquakes and sea level rise.
One example we identified focuses on how businesses and other organisations can use this broad range of risk categories to identify blind spots in their transition-related strategies.
Greening the financial system
Regarding the Financial risk class, the Centre’s research taps into work done by the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), which was launched at a Paris meeting in 2017. The organisation produced a report in 2020 that defined transition risks as those that “will affect the profitability of businesses and wealth of households, creating financial risks for lenders and investors. They will also affect the broader economy through investment, productivity and relative price channels, particularly if the transition leads to stranded assets”, or resources that lose their value due to unexpected shifts in technology, regulation and other factors.
The Financial class of risks outlined in the Taxonomy includes economic variables such as energy price fluctuations, market crisis such as industry underperformance and company outlook such as climate-related credit rating downgrades.
Turning risk awareness into resilience and opportunity
Addressing a 1961 conservation conference, President Kennedy also said: “I believe that the people of this country are prepared to take the necessary steps to preserve our natural heritage – to pay the price of progress, to meet the needs of the present without compromising the ability of future generations to meet their own needs.”
Likewise, nearly 65 years on, the Taxonomy concludes on an optimistic note: despite the very real threat of financial, social and other risks associated with a lower-carbon transition, the framework “aims to proactively identify transition risks for businesses within the next 10 years, understand their systemic interactions and develop tools that support strategic resilience-building across sectors.”
Among the Centre’s many reports are stress tests based on fictional but plausible catastrophes ranging from financial collapse (including a property-price crash) to disruption of the consumer sector (due to natural disaster, cyberattack and other occurrences) and terrorism.
While some of the Centre’s reports paint a sobering picture – the summary of a recent report on California wildfires said higher exposure to such fires “increase wildfire destructiveness, this can lead to long lags in recovery, and in some cases, no recovery at all” – a finding there and across the Centre’s other work is that proactive measures like adopting stronger building codes can help optimise disaster resilience and lead to faster recovery from climate-linked natural disasters.
Adds Professor Danny Ralph: “The topic of climate change is on the agenda of boards, and the climate transition risk taxonomy can structure awareness at that level. Responding to these challenges needs scenarios – to translate systemic change into operational and strategic impacts on organisations.”
The topic of climate change is on the agenda of boards, and the climate transition risk taxonomy can structure awareness at that level. Responding to these challenges needs scenarios – to translate systemic change into operational and strategic impacts on organisations.
Featured academics
Danny Ralph
Professor of Operations Research
Fernanda Lammoglia
Research Associate, Centre for Risk Studies
Related content
Cambridge Centre for Risk Studies (2025) Cambridge taxonomy of climate transition risks. Cambridge: Cambridge Judge Business School.
Centre for Risk Studies
The Centre investigates catastrophes across the world, providing the frameworks for recognising, assessing and managing the effects of systemic threats. By charting shockwaves on the international economy, financial markets, firms in the financial sectors and global corporations, we build a clear picture of the causes of these disasters, as well as the best ways to mitigate them in the future.
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