Concerns about greenwashing could make it more expensive for governments and businesses to finance the shift towards a low-carbon economy, according to new research examining how investors assess climate transition bonds. The findings suggest that doubts about environmental promises can outweigh the financial benefits of sustainable investment labels.
Climate transition bonds are designed to help carbon-intensive industries, including steelmaking, chemicals and energy production, reduce their greenhouse gas emissions. Unlike conventional green bonds, which generally fund specific environmentally friendly projects, transition bonds support the gradual transformation of industries that cannot easily eliminate emissions.
Japan became the first country to issue sovereign climate transition bonds in February 2024 under its Green Transformation (GX) initiative. The programme provides an opportunity to examine whether investors are willing to accept lower returns to support decarbonisation or demand higher yields to compensate for uncertainty.
A research team led by Professor Kentaka Aruga of Saitama University, working with doctoral students Michał Ostrowski of the University of Wrocław and Ihsan Ullah of Saitama University, investigated investor attitudes towards Japan’s GX bonds. Their findings were published on 7 October 2026 in the International Review of Economics and Finance.
The researchers surveyed 644 financially experienced Japanese individuals, examining how environmental preferences, portfolio size, investment behaviour and perceived financial risks influenced the returns investors expected. The results revealed considerable differences in how investors valued environmental commitments.
Overall, GX transition bonds offered no clear advantage in reducing financing costs. The average additional yield demanded by investors was close to zero, suggesting that enthusiasm for sustainable investments was largely offset by concerns about risk and credibility.
Investors already holding environmental, social and governance (ESG) bonds were willing to accept yields approximately 3.4 basis points lower. However, environmentally conscious investors with portfolios worth at least 100 million yen demanded a predicted premium of 9.4 basis points over comparable conventional government bonds, revealing a surprising divide between environmental priorities and investment expectations.
Greenwashing concerns produced an even more striking difference. Investors unconcerned about misleading environmental claims were willing to accept a yield discount of 10.8 basis points, while those expressing the strongest concerns demanded a premium of 4.8 basis points. The resulting 15.6-basis-point gap suggests that doubts about environmental credibility could significantly increase borrowing costs. Liquidity concerns also raised required yields by approximately 4.5 to 5.7 basis points.
“The important question is not simply whether investors prefer environmentally friendly investments, but how much confidence they place in the promised transition,” Professor Aruga explained. He noted that sustainable bonds do not necessarily share a universal financial advantage, as investors differ in their financial circumstances, behaviour and sensitivity to risk.
The researchers argue that transparent reporting, independently verified environmental commitments and credible transition plans could help build investor confidence and potentially lower financing costs. However, they caution that the findings reflect stated investment preferences rather than actual bond transactions. Further studies using market trading data will be needed to establish whether these attitudes translate into real-world borrowing costs.
More information: Kentaka Aruga et al, The large-scale investor ESG paradox and greenwashing penalty: Evidence from Japanese GX transition bonds, International Review of Economics & Finance. DOI: 10.1016/j.iref.2026.105929
Journal information: International Review of Economics & Finance Provided by Saitama University