Transition climate risks occur as society shifts toward a low-carbon economy. This transition can introduce structural financial shocks for carbon-intensive industries and their lenders.

When governments implement strict environmental regulations (such as carbon taxes or clean energy mandates), the business models of carbon-intensive firms can become unviable, leading to Asset Stranding:

[Strict Carbon Regulations Enacted] ---> [Fossil Fuel Reserves Unusable] ---> [Corporate Book Valuations Collapse] ---> [Widespread Credit Defaults]

Fossil fuel reserves or industrial assets that were once valued at millions can become economically stranded, driving corporate bankruptcies and creating significant credit losses for the commercial banks that financed those sectors.