Assessing the Impact of Climate Physical Risk on Capital Markets: Evidence from Chinese Energy Stocks

Intensified climate change has brought about increasing climate physical risks, which have a substantial impact on the energy market. In this paper, based on the panel data of listed companies in China's energy industry from 2016-2023, we refer to the construction of the Climate Physical Risk Composite Index (CPRI) to systematically analyze its impact on energy stock return. The empirical results show that climate physical risk significantly dampens energy market return, and this negative effect is more significant among new energy firms, non-state-owned firms, large firms, and firms in regions with lower levels of economic development. Further mechanism tests find that investors' concern about climate change significantly amplifies the market shock of physical risk, and its impact has a lagged effect. This paper enriches the research on climate risk, explores the mechanism of climate physical risk in the energy stock market, and provides policy recommendations to effectively deal with climate risk shocks.