Transition Risk & Business Models
Transition Risk Is Business Model Change. Not Strategy.
The Distinction
Strategy assumes the model is sound
When some organisations talk about managing transition risk, they talk about strategy. You may have heard the terms: a new sustainability strategy, a climate strategy, an ESG strategy bolted onto the existing plan.
Yet strategy assumes the business model is sound. So the question implied is which direction to point it.
Transition risk asks a different question entirely: is the model itself viable through what is coming?
I learned the difference between strategy and capability from the world's authority on the subject, my father. He played rugby for his state. Strategy was the game plan: which moves to make, which spaces to exploit, how to read the other side. But he was very clear that a game plan is worthless if the fitness, the skills, and the structures behind the team cannot deliver it under pressure.
Strategy is choosing which league to play in. Your business model is whether you can actually compete once you're there.
Richard Rumelt, a thinker I respect on strategy, observes that most organisations cannot distinguish between a strategy and a business model, which means they end up governing neither well.1
When the board approves a sustainability strategy, it may believe it has addressed transition risk. It has not. It has pointed the existing model in a direction. That is not the same as having a model that holds in the face of the physical risks and emergent risks that surround today's organisations.
Adaptation is not the easy path
Some boards hear "business model change" and think: we'll adapt. We'll deal with physical risks as they arrive. We won't invest in transition. We'll adjust as needed.
This sounds pragmatic. It is not.
The adaptation path means investing in physical resilience: relocating assets out of exposed geographies, rethinking supply chain routes around climate disruption, repricing insurance exposure annually, building redundancy that competitors who invested in transition do not need.
Walking into adaption risks means accepting higher operating costs not as a one-off adjustment but as a permanent feature of your business model. It means the board acknowledging: our model requires ongoing, increasing investment just to maintain current performance in a deteriorating operating environment.
London Business School and Columbia University found a pattern: some firms facing significant climate risk are not accelerating transformation. They are investing in adaptation or lobbying for delay: strategies that reduce short-term pressure while compounding long-term exposure.2
Transition is investment with a return. Adaptation is cost without a ceiling. Delay is both.
There is no comfortable middle. There is no path where the board does nothing, at least not one with good governance.
The question is which transformation the business model is being prepared for, and whether the board has chosen consciously or negligently drifted into one by default.6
How transition risk hits a business model
The six channels of transition risk do not hit a strategy. They impact the model underneath it.
Cost of Capital
Does not change your strategy. It changes the economics of funding your operations. Bloomberg data: 22 basis points of additional financing cost for every 10-point increase in physical risk. For a capital-intensive business, that is a structural repricing of the model itself. When assets become stranded, when they become unfinanceable at historic rates, the balance sheet shifts beneath you even faster.
Performance Premium
Does not reward your strategy. It rewards your model's business model resilience. Companies with resilient models are outperforming by 650 basis points over a decade. The gap is structural, not cyclical. Capital allocation toward transition is becoming a source of competitive advantage, not a cost.
Hidden Erosion
Does not slow your strategy. It degrades your model's capacity to deliver. The transformation programmes that never quite land. The capability loss that accumulates silently. The operating model transformation that was approved but never actually happened because the organisation's readiness was assumed, or deferred, not assessed and actioned.
Catastrophic Event
Does not disrupt your strategy. It invalidates the assumptions your model was built on. A $600 billion pension fund, CPP Investments, discovered this when a Chilean toll road investment failed, not through financial miscalculation but through social licence erosion. The community withdrew consent. The model's assumption that consent was permanent turned out to be wrong. This is not a Taleb black swan. It is a green swan. Green swans are what the Bank for International Settlements calls a predictable but underestimated systemic risk.
Human Capital
Does not challenge your strategy. It determines whether your model can adapt at all. The people who carry the judgment, the institutional memory, the relationships that make the model work. People are affected by the AI transition and whatever you do for resilience. Underinvest in their readiness and the model loses its capacity to change.
Regulatory Compliance
Does not add a requirement to your strategy. It multiplies the frameworks your model must satisfy simultaneously. Divergence across jurisdictions means the model needs to hold across multiple regulatory environments, not simply produce a climate transition plan for the home market.
A strategy response adjusts direction within the model. A business model response asks whether the model itself holds across all six channels simultaneously: the revenue model risk, the cost structure exposure, the asset base vulnerability. These are model questions, not strategy questions.
The Diagnostic
Why boards get stuck on transition risk
If you have ever sat in a board meeting thinking you've heard the debate before, you might appreciate Clayton Christensen's view that incumbent boards consistently fail to approve business model innovation. It is not a lack of intelligence. Boards are bright. He identifies that their incentives and metrics are anchored to the current model.3 In the real world, a new model replaces the existing one. So governance structures built to optimise the current model actively resist approving its successor.
Even the term 'cannibalise' puts boards off acting. 'Let's get another nibble of the old model before it's gone' seems implicit in the word.
There is a name for this: active inertia. Donald Sull at MIT coined it. Boards double down on the existing model's logic precisely when it needs replacing.4 This is not ignorance. It is a systematic cognitive trap at governance level. The more pressure the board feels, the harder it works to make the current model succeed, rather than asking whether the model itself is the problem.
Now consider reconfiguration readiness. Rita McGrath at Columbia asks: how ready is your business model to reconfigure? The governance challenge is this: governance frameworks assume stability.5 When the framework assumes stability, it produces strategy responses that focus on doing more of the same. Business model change requires a framework that assumes instability, one that treats the business model itself as the variable, not the constant.
A colleague I call Marshall from Marsh put it bluntly over coffee: "This is business model change, not strategy." He is naming the trap.
The board that responds to transition risk with a strategy is applying the wrong framework. The board that asks "does our model hold?" is asking the right question. And they may discover the instruments they relied on cannot answer it.
Where does your business model sit on transition risk?
Not every business model faces the same exposure. Think of it as a league structure, like rugby. Not because business is a zero-sum game, but because leagues do something important: they lift the collective standard. They create capacities. The rules get better. The players get sharper. The organisations that invest in their own capability find that the league itself rewards them. The game gets better, more interesting, and more rewarding. Those that don't find the game moving past them.
Five levels describe the progression.
Compliance
You are on the field. The model treats transition as a reporting obligation. A compliance tick box. The sustainability team produces reports. The board signs off. There is nothing wrong with being here. Every organisation starts somewhere. But at this level, the model has no structural response to the six channels of transition risk bearing down on it. The risk is not that you are doing something wrong. The risk is that the game is changing around you and your model is not changing with it. Active inertia keeps many boards optimising here, working harder within the current model thinking this is resilience and survival, rather than building toward the next level.
Efficiency
You are competing locally. Your business model has captured operational gains: lower energy costs, waste reduction, resource optimisation. There is real value here. But the model is still fundamentally the same model, running more efficiently. Efficiency protects margin. It does not protect the model from repricing, reselection, or regulatory divergence. You are a better version of what you were. You are not yet what the league will require.
Positioning
You have made the league. This is no small move. The business model is being deliberately repositioned around transition. Decarbonisation is part of the model. You are not simply running an old model more efficiently. You are building business model resilience into how the company competes. This shows up in preferred supplier status, better terms on capital, and talent retention that competitors at Levels 1 and 2 are losing. This is where competitive advantage begins to compound and where the league structure itself starts rewarding you.
Margins
You are competing at the top tier. The model commands premium margins because of its transition readiness. Investors pay more for it. Buyers prefer it. Readiness is not a cost. It is the source of margin. The 650 basis points of outperformance shows up here. Sustainability and resilience are integrated into value creation, not treated as a compliance exercise.
Multiples
Setting the standard. The business model commands higher valuation multiples because transition readiness compounds value across capital markets, talent markets, customer markets, and regulatory positioning simultaneously. This is where the model becomes genuinely difficult to compete with, and where reconfiguration readiness becomes the organisation's defining capability. Like the hallowed All Blacks, your culture itself is an asset. The way your organisation operates and shows up lifts everything around it.
The question here is not "are we doing enough on sustainability?" The question is: which level is our model operating at? And what does that mean for our exposure?
How to tell if you have a strategy problem or a business model problem
The signals are different. Recognising which you face determines whether your response is adequate.
You have a strategy problem if:
Your model generates revenue, funds operations, and attracts talent in ways that hold through the transition, but your direction, priorities, or pace need adjusting. The structure is sound. The steering needs work.
You have a business model problem if:
The sources of your revenue are being repriced by transition. The cost structure depends on inputs being disrupted. Assets sit in locations or sectors being revalued. Your balance sheet is sitting on potentially stranded assets sinking in slow motion. Your workforce capabilities were built for an operating environment that no longer exists.
The clue: the revenue model risk is structural, not directional.
If you are setting new targets, producing better reports, and appointing sustainability committees while the business model underneath erodes, you are using strategy to fix something it was never designed to fix.
What responding to a business model challenge actually looks like
A strategy response adjusts direction based on the structure. A business model response rethinks the structure itself.
Strategy response
Set new sustainability targets, improve ESG reporting, produce a climate transition plan, appoint a Chief Sustainability Officer, update the risk register, communicate commitments to investors. Valuable. Necessary. Insufficient if your business model is the problem.
Business model response
Examine where revenue comes from and whether those sources hold through transition (or adaption). Assess whether cost structures survive repricing of energy, materials, insurance, and capital. Evaluate whether the asset base is positioned for a lower-carbon operating environment or stranded in a fossil-era one. Determine whether the workforce has the capabilities the transitioned model requires, not the model you have today. Rethink capital allocation: are you investing in optimising the current model, or building the next one?
Decide whether you are building toward Level 3, 4, or 5, or defending Level 1 with better reports.
The difference is not effort. Both require significant investment. The difference is what you are investing in: refining direction within the current structure, or building the model that holds through the transition.
One question to take to your leadership team
Not five questions. One.
Is our current model viable through what's coming? Or are we optimising a model that's being repriced underneath us?
If the room goes quiet, you have your answer. And a conversation exists.
Ready to find out which level your business model is operating at?
Start a Conversation →Where to go deeper
- Transition Risk and Board Governance: how to govern transition risk at board level. Five questions for your next meeting. How to govern transition risk at board level →
- The Risk That Regulation Forgot: publishing with the Hinrich Foundation (~180,000 subscribers). Read the full analysis →
- ClearSight methodology: how the Three-Lens Framework, six risk channels, and three instruments make transition risk visible at business model level. How the Three-Lens Framework and six risk channels work →
- ClearSight Intelligence Cohort: where directors close the gap between framework and readiness. Six weeks. Senior peers. The lens to lead the conversation your risk committee hasn't had yet. Express interest in the next cohort →
- Ongoing insight for boards: where Joanne thinks out loud about what boards need to see, including what each fraction of a degree means for your business model. Subscribe: what each fraction of a degree means for your business model →
How do you tell if transition risk is a business model problem?
Notes
- Rumelt, R. (2011), Good Strategy Bad Strategy. Crown Business.
- Li, X. and Flammer, C. (2025), "Climate Risk Exposure and Firms' Climate Strategies," NBER Working Paper No. 34276. London Business School and Columbia University.
- Christensen, C.M. (1997), The Innovator's Dilemma. Harvard Business School Press.
- Sull, D. (1999), "Why Good Companies Go Bad," Harvard Business Review. See also Sull, D. (2003), Revival of the Fittest. Harvard Business School Press.
- McGrath, R.G. (2013), The End of Competitive Advantage. Harvard Business Review Press.
- Columbia Climate Litigation Updates, March 2026. See also Commonwealth Climate Law Initiative, which documents directors' duties across common law jurisdictions. In Singapore, the business judgment rule does not protect directors who fail to inform themselves or consciously disregard climate risks.
About the author
Joanne Flinn is Chairperson of ESG Institute (B Corp) and was named to the Thinkers50 Radar 2026, one of 30 thinkers shaping the future of management. A former PwC Country Head and Head of Change on the IT ExCo at DBS Bank, she built the ClearSight™ methodology from 35+ years of transformation leadership. Her research spans 20 stock exchanges and over 1,000 listed companies.