Climate shocks and corporate default risk: Evidence from China

The urgency of addressing climate change has heightened as a result of extreme weather events. Energy companies face physical and regulatory shocks, impacting their financial standing and debt default risk. This paper examines default risk formation mechanisms for listed energy firms under climate change shocks. Utilizing panel data from Chinese listed energy firms spanning the years 2011-2021, this study examines the impact of climate shocks on default risk. The findings indicate that intensified climate change significantly elevates default risk, revealing a nonlinear relationship influenced by the intensity of environmental regulation. This analysis underscores the importance of regulatory frameworks in moderating the effects of climate-related risks on corporate financial stability. Climate change raises financing costs and reduces operating profits, affecting default risk, particularly for firms in regions with high environmental concern. The implementation of the Paris climate agreement post-2015 has spurred stricter policies, magnifying the contributory effect of climate shocks on energy firms' default risk. This study underscores the criticality of integrating environmental considerations into financial risk assessments for energy companies.