Climate risk and stranded assets

Climate change creates two kinds of financial risk.

Physical risk comes from the climate itself: more frequent floods, heatwaves, cyclones and droughts, and slow changes such as rising temperatures and sea levels. These can damage assets, disrupt supply chains and reduce worker productivity.

Transition risk comes from the shift to a low-carbon economy: carbon prices, new regulations, cheaper clean technology and changing customer demand. These can make some assets and business models less valuable.

A stranded asset is an asset that loses value earlier than expected, or has to be retired early, because of such changes. In the climate context, coal mines, thermal power plants and oil and gas reserves are the usual examples. If the economy moves away from fossil fuels faster than a company's plans assume, part of its asset base may never earn the returns it was built for.

India faces both risks at once. It depends heavily on coal for power and has a large base of energy-intensive industry, which creates transition risk. It is also highly exposed to physical risk through monsoon dependence, long coastlines and climate-sensitive agriculture. At the same time, the national target of 500 GW of non-fossil electricity capacity by 2030 creates large opportunities for investors.

Types of climate risk

Physical risks

• Acute: event-driven, such as cyclones, floods and heatwaves. Coastal plants, ports and warehouses are exposed to cyclones; agricultural supply chains are exposed to monsoon failures.
• Chronic: long-term shifts, such as higher average temperatures, sea level rise and changing rainfall. Infrastructure in coastal cities faces this over decades.

Transition risks

• Policy: carbon pricing (in India, the Carbon Credit Trading Scheme), efficiency standards, renewable purchase obligations
• Legal: lawsuits against high emitters and claims over misleading climate disclosures
• Technology: cheaper solar, wind and batteries displacing thermal power; electric vehicles reducing fuel demand
• Market: customers and investors moving away from high-carbon products
• Reputation: pressure from activists, lenders and communities

Stranded asset analysis: five steps

1. Estimate the asset's remaining useful life and cash flows under business as usual.
2. Choose climate scenarios to test against (for example, the scenarios published by the IEA or the NGFS, the central banks' network on climate).
3. Find the carbon price, or demand level, at which the asset stops covering its costs.
4. Judge how likely each scenario is, and when it might happen.
5. Estimate the possible impairment against the asset's book value.

Regulatory push in India

RBI's Directions on climate finance and the management of climate change risks, issued on 28 November 2025, set rules for green deposits and green lending, with the stated aim of helping banks and NBFCs assess and manage climate risk. RBI has also issued a draft framework for lenders to disclose climate-related financial risks. Over time, this affects which projects get financed and at what price.