Signaling Climate Transition Capacity: How Environmental Expenditures Attenuate the Carbon Risk Premium

ABSTRACT

This study investigates the pricing of carbon risk among publicly listed firms in Asia. We first develop a theoretical model of the carbon risk premium grounded in information asymmetry, which posits that a firm's environmental expenditures serve as a credible signal of its climate transition capacity. We then test these predictions using a novel panel dataset of 144 green bond issuers from 2005 to 2023. Our empirical analysis confirms the existence of a statistically significant, positive carbon risk premium in the region. Crucially, and consistent with our theoretical framework, we find that this premium is attenuated for firms with higher environmental expenditures. We further uncover that the modest scale of this premium is driven by investor heterogeneity: Long‐term institutional investors penalize high‐emitting firms but reward those with significant environmental spending, while short‐term strategic entities exhibit opposing behavior. Based on these findings, policymakers can mobilize corporate resources to address the carbon risk premium through three complementary levers: implementing stringent climate policy, enhancing climate finance taxonomies, and mandating standardized transition risk disclosure.