Return of Transition Risk?

Until recently transition risk — the possibility that your investments would suffer as the world transitioned away from fossil fuels — was pretty much dead to the investing world. But perhaps the reports of its death were greatly exaggerated.

At Novata, we work with hundreds of investment firms and banks, and thousands of companies, on sustainability and risk. Through the end of 2025, transition risk had been slowly but surely disappearing from the agenda. No global price on carbon had materialized. The energy security argument had flipped in favor of more production, not less.

If the world wasn’t actually transitioning away from hydrocarbons by choice, if the high price on fossil fuels wasn’t coming, why plan for it? Why restructure supply chains, stress-test energy costs, or take on the overhead of decarbonization programs because of a risk that wasn’t materializing?

Then the high price arrived. Just not the way anyone expected.

Operation Epic Fury began on February 28th. Oil rose from $72 a barrel to over $110 in five weeks. American consumers faced gas prices over $4 per gallon for the first time since 2022. Diesel hit $5.45, up 45% since the war began.

Last week, David Wallace-Wells had a great piece in the NY Times where he built on Emily Grubert’s work to characterize this as a “midtransition” war: a conflict that spans the old era of fossil energy and the new one of renewables, arriving at a moment of heightened vulnerability. We are deep enough into the transition that the old system is strained, but not far enough that the new one can absorb the shock.

What’s striking, and deeply ironic, is that this “midtransition” war has effectively put a price on carbon that may in fact speed up the transition. You can see it at the micro and macro level, with companies, investors, and even countries wrestling with how to manage this newly visible risk.

A Taxless Carbon Tax

Brent crude was approximately $72/barrel before the war. At its peak, it surged above $116. This war premium, when translated into a cost per ton of CO2, implies an effective carbon price of over $100/ton. Notably, that back-of-the-envelope figure exceeds even the price of carbon under the EU Emissions Trading System, one of the most ambitious carbon pricing regimes in the world.

Markets have just priced carbon more forcefully than any legislature could, through a supply shock rather than policy. As Ben Dear recently pointed out in IPE, “The price of fossil fuels almost serves as a carbon price in itself at the moment.”

To be clear, this is not the carbon tax that policy wonks wanted. But perhaps we’re getting the carbon tax that we deserve? It generates no revenue. It funds no transition. It creates no durable price signal that investors can build around. It is the cost of carbon without any of the benefits of carbon pricing.

Risk in an “All of the Above” Energy Era

The classic framing of transition risk assumed that fossil fuel investments would suffer as the world moved away from hydrocarbons, that a carbon tax or regulatory pressure would strand assets and punish companies with heavy fossil fuel exposure. Under that model, going long on renewables and underweighting oil and gas was the logical call.

What this war illustrates is that the risk story is more complicated than we thought. Supply shocks don’t punish fossil fuel investments the way taxes do. They reward them, at least in the short run. An oil major with producing assets and a diversified supply chain is doing just fine right now. The companies feeling the pain are different ones: those with energy-intensive operations, fossil fuel-dependent supply chains geographically exposed to the conflict zone, and limited flexibility to absorb volatile input costs.

We may well be in an “all of the above” energy era for the foreseeable future, when both fossil fuel and renewable investments perform, for very different reasons, simultaneously. That is not a contradiction. It is the messy reality of the “midtransition.”

The Transition Risk that Remains Real

So what should companies actually be worried about?

It seems clear that fossil fuels will not become worthless overnight. The more immediate risk is that energy price volatility could become a structural feature for the foreseeable future, not a temporary shock.

Companies building out supply chains, planning capital expenditures, and making long-term commitments are being asked to do so against the backdrop of energy costs that can move 60% in five weeks. That is a major risk, whether you call it transition risk, geopolitical risk, energy risk, or supply chain risk.

The companies that reduced fossil fuel exposure and invested in energy efficiency, electrification, and supply chain resilience over the past five years did not do so in vain. They may not have anticipated this specific shock. But they built organizations that are less exposed to it. That’s effective risk management.

Going forward, the companies best positioned to manage energy-related risks will be those that understand their exposure. Every company should:

• Understand the energy intensity of their supply chains and internal operations

• Benchmark these numbers against peers to understand relative strength or weakness

• Model the P&L impact of future energy shocks and compare it to the cost of risk mitigation through investments in energy efficiency or diversification of energy sources

Just Don’t Call It Transition Risk

The words “transition risk” have largely disappeared from the current conversation, replaced by “geopolitical risk” and “energy security.” BlackRock’s Geopolitical Risk Dashboard is tracking Middle East escalation as a top market risk. DLA Piper’s 2026 energy transition M&A report describes investors responding to “macroeconomic volatility, geopolitical risk and evolving policy frameworks.” Just don’t call it transition risk.

How about you? Are you viewing the war as a temporary geopolitical shock to ride out, or as evidence that energy exposure needs to be managed differently going forward?

The transition was always going to be messy. In fact, it is messier than anyone expected. The risk never went away. It just stopped waiting for policy to arrive first.