How do energy firms respond to climate risks? Theoretical framework and empirical evidence from Chinese listed energy firms

Climate change-induced risks have become an important factor shaping corporate investment behavior. We develop a theoretical model and employ text-based measures of climate transition and physical risks to investigate how these risks influence the investment decisions of Chinese energy firms. Our findings reveal that climate risks prompt energy firms to increase financial investment while discouraging real investment as a hedging strategy. Specifically, the increase in financial investment is concentrated in cash and short-term investments, whereas the decline in real investment is primarily reflected in irreversible fixed assets. Mechanism analysis shows that financing constraints intensify the effect of climate risks, while better ESG performance buffers the impact of climate transition risk. Furthermore, climate risks increase operational volatility, driving firms to leverage financial assets to mitigate default risk. Heterogeneity analysis indicates that these impacts vary significantly across firm size and ownership structure.