From Environmental to Corporate Financial Risk: The Climate Risk Channel—Empirical Evidence from China

An increasing body of empirical research indicates that climate risk adversely impacts corporate operations, with financial performance being one of the most immediately affected domains. This study develops a firm-specific climate risk metric by textual analysis of the annual reports of Chinese A-share listed businesses from 2007 to 2023 and empirically investigates the influence of this metric on corporate financial risk. The findings indicate a statistically significant positive correlation between firm-level climate risk exposure and financial risk. Further mechanism tests find three important transmission channels: increased financing constraints, reduced inventory buffer, and more severe debt maturity mismatch. In order to address the issue of endogeneity, this study uses a multi-method identification strategy, which includes instrumental variable estimation, propensity score matching, and a difference-in-differences design based on the implementation of the Paris Agreement. Cross-sectional analysis also shows that the documented effect is more severe for firms with low information transparency and high carbon emissions. In general, this study adds to the existing literature on the climate-finance nexus by providing a micro-level risk transmission framework that can be used for corporate climate resilience planning and regulatory policy design.