Changing Colors: Adaptive Capacity of Companies in the Context of the Transition to a Low Carbon Economy
This paper seeks to explore the question of adaptive capacity of companies to financial risks that may arise in the context of the transition to a low-carbon economy. While financial analyst models provide results in cash flows and / or risk indicators (e.g. value at risk), they also implicitly include assumptions about adaptive capacity. The paper positions the question of adaptive capacity as a basic framework to interpret the elasticity of revenue or profit growth to sectoral and / or GDP growth. It argues that long-term adaptive capacity in particular in response to transition risks associated with a too late, too sudden scenario, is usually not explicitly modelled by analysts. Reasons explaining this include the lack of demand for long-term risk assessment by clients and the uncertainty of long-term risks, this poses a challenge to understanding transition risks. The paper suggests that potential solutions to overcome this gap include stress-testing worst case scenarios, probabilityweighted response scenarios, modelling based on historical role models, bottom-up assessments, and / or adjustments of risk premium.
