Some firms assume that declaring a net zero target will automatically improve how investors view climate risk.
Yet investors are becoming more sophisticated than that: A recent paper by Keith Chan and Wilson Wan in the Journal of Corporate Finance argues that net zero commitments can actually increase a firm’s carbon risk premium if investors doubt the credibility or feasibility of the transition.
That is highly relevant for valuation, because it shows how carbon risk feeds through into the cost of equity and hence enterprise value.
Investors are assessing “transition readiness”
Chan and Wan argue that investors increasingly distinguish between:
- transition ambition (the target itself), and
- transition readiness (whether the firm can realistically achieve it).
In practice, investors appear to focus on three broad areas.
1. Does the company have credible environmental capability?
The study finds that firms with stronger environmental policies and systems are viewed differently by investors.
A net zero target backed by:
- operational capability,
- governance,
- credible execution,
- and long-term oriented investors
is more likely to support confidence in the transition pathway.
Without that credibility, the target may instead signal future execution risk and rising costs.
2. Is there genuine regulatory and market support?
The surrounding policy environment also matters:
- carbon pricing,
- decarbonisation policy,
- regulatory pressure,
- and transition urgency.
A target announced in a jurisdiction with strong transition infrastructure and policy support is fundamentally different from one in a market where climate policy remains weak or inconsistent.
For valuation, this affects assumptions around:
- capex,
- energy costs,
- margins,
- competitiveness,
- and long-term resilience.
3. Does the country have transition capacity?
The paper also highlights the importance of transition capacity, including access to renewable electricity and broader energy infrastructure.
Two firms with similar targets may face very different transition economics depending on where they operate.
That matters because investors increasingly assess whether decarbonisation is realistically achievable — not simply whether a target exists.
The key conclusion
One of the paper’s most striking findings is that firms with low transition readiness may actually experience a higher carbon risk premium after declaring net zero commitments.
Why?
Because investors may anticipate:
- high abatement costs,
- operational disruption,
- stranded assets,
- or unrealistic transition assumptions.
In other words:
a net zero target alone does not remove investor concerns around climate risk.
Implications for valuation
This is why sustainability cannot simply be treated as a generic ESG adjustment in valuation models.
The valuation impact depends on:
- the credibility of the transition pathway,
- operational capability,
- sector economics,
- geography,
- policy support,
- and investor confidence in execution.
At Sustainable Valuations, this matches with our findings. Markets are not only pricing climate ambition — they are pricing transition credibility.
Source: Chan, K.J.D. & Wan, W.T.S. (2026), “The double-edged sword of corporate net zero commitment on the carbon risk premium”, Journal of Corporate Finance.