The Dark Side of AI Readiness? Institutional Logics, Signalling and Carbon Transition Risk

The influence of institutional environments on corporate sustainability is well established, yet how digital readiness restructures institutional logics and signalling mechanisms through which firms manage carbon transition risk (CTR) remains undertheorised. We address this gap by investigating how country level artificial intelligence readiness (AIR) interacts with corporate governance structures and internal climate policies to shape firms' exposure to CTR. Drawing on institutional logics and signalling theory, we conceptualise AIR as a macro‐institutional condition that simultaneously enhances firms' technical capacity for transition risk management and reorders the hierarchy of logics through which sustainability is interpreted and legitimised. Using panel data from 5363 sample firms between 2020 and 2023, we find that AIR is associated with lower CTR, reflecting improved information processing, forecasting and technocratic risk management capabilities. However, AIR also has a dark side. As AIR increases, the risk mitigating effects of governance and climate policies weaken or reverse, as these mechanisms are subsumed under market–state logics and repurposed as sustainability signals. This enables symbolic compliance, erodes disciplinary control and shifts legitimacy from carbon reduction to visible digital competence. Our findings contribute to existing sustainability and governance discourse by reconceptualising AIR as an institutional condition, showing that its effects on CTR are contingent on governance, institutional logics and signalling incentives thereby advancing a contingent theory of AI‐enabled sustainability governance. By integrating signalling and institutional logics, we offer explanations as to why governance and climate policies lose effectiveness in AI‐ready contexts and reframe CTR as an outcome of institutional alignment rather than technological capability.