Will emission reduction commitments hedge the carbon risk premium?

Abstract

Under the goal of “carbon peaking” and “carbon neutrality” in China, it is significant to explore whether emission reduction commitments contribute to carbon risk premium. Therefore, based on a sample of Chinese listed companies that publicly disclosed questionnaires in the CDP from 2009 to 2021, this paper empirically examines the relationship between emission reduction commitments and carbon risk premium and their formation mechanism. The results show that emission reduction commitments can effectively hedge the carbon risk premium, which pass several robustness tests. Specifically, the more comprehensive and ambitious the commitment is, the greater the suppression of the carbon risk premium. The mechanism test shows that disclosing emission reduction commitment information can reduce carbon risk by improving investor confidence and attracting political resources. Differences in enterprise emission levels, regional environmental regulation intensity and green financial development result in different risk-hedging effects of emission reduction commitments. Moreover, the greater the substantial pressure from stakeholders, the greater the tendency for firms to set up emission reduction commitments. Finally, the heterogeneity analysis reveals that confidence level of commitments has a significant impact on risk premium. Specifically, enterprises with SBTi validation, higher CDP ratings and higher target completion are more helpful in curbing carbon risk premium. Our findings contribute to corporate commitment to climate change and complement the carbon risk premium hypothesis.