Recent developments in climate transition policy (e.g., the UK’s electric vehicle roll-out, US political statements on climate change) and uncertainties surrounding industry and consumer adoption of low-carbon technologies highlight the need for a richer uncertainty framework in climate transition outcomes. These uncertainties create financial risks for firms, investors, banks, and sovereign entities. Current literature (e.g., Cormack & Shrimali) and institutional reports (e.g., ISDA, CFRF, NGFS, ECB, BoE) focus on modelling climate risk transmission to financial impacts. Increasingly, there is a push to incorporate probabilistic frameworks (e.g., Rebonato & Kainth, Kenyon et al.) to better quantify climate risk variability. This article proposes a probability space for climate transition risk, linking GHG emission trajectories to industry- and region-specific policies. We introduce novel financial instruments to help firms mitigate risks from climate policy shifts. One such instrument, the Climate-Contingent Convertible (CLoCo) Bond, allows firms to reduce default risk from adverse policy changes, increasing firm value while lowering systemic banking risks and sovereign bail-out costs. By integrating probabilistic climate risk modelling with financial innovation, our approach offers tangible, policy-linked risk-reduction tools for firms, investors, and governments navigating the uncertainties of climate transition.
