Pressure Makes Diamonds: Do Extreme Climate Risks Force Firms to Innovate Green?

As climate change poses growing sustainability challenges worldwide, companies face unprecedented pressure to innovate in environmentally sustainable ways. This study examines the impact of extreme climate risks on corporate green innovation through the State-Pressure-Response framework, using data from Chinese A-share listed companies between 2014 and 2024. Results demonstrate that extreme climate risks significantly promote corporate green innovation levels. Mechanistically, climate risks exacerbate companies’ financing constraints, yet under evolving green finance architectures, this financial pressure can drive them toward green innovation to improve their access to preferential green financing channels. Media attention amplifies this sustainability-oriented response by heightening reputational stakes, while managerial myopia weakens it by prioritizing immediate performance over long-term sustainable development. The effect is most pronounced among heavily polluting industries and state-owned enterprises, revealing differential pathways toward sustainable transformation. These findings offer valuable guidance for policymakers seeking to harness climate pressures for sustainable transformation through targeted green finance expansion, mandatory climate risk disclosure frameworks, and corporate governance reforms that align executive incentives with long-term environmental performance.