Pricing Climate Physical Risks in Bond Markets: Can Adaptation Strategies Help? Evidence from China by Hongling Guo, Feng Ma, Zhaoxin Li, Fujing Zhang :: SSRN

This study examines the impact of climate physical risks on corporate bond issuance pricing and its underlying mechanisms within China's climate environment and institutional context. The findings reveal that climate physical risks increase bond credit spreads through two primary channels: eroding firms' intrinsic value (cash flow volatility and investment inefficiency) and amplifying external pressures (capital rationing, equity market risk spillover, and litigation risks), with more pronounced effects in high-sensitivity sectors such as energy and utilities. Further analysis uncovers a dual-threshold effect (climate physical risk index, CPRI=21.77 and 24.19) in climate risk pricing, demonstrating a dynamic evolution in investor responses from "neglect" to "acute sensitivity" and finally to "marginal adjustment." A multi-layered resilience framework—comprising micro-level corporate climate physical risk disclosures, meso-level supply chain resilience, and macro-level urban adaptation capacity—effectively mitigates climate risk premiums. The study not only advances the theoretical frontier of "climate risks–climate resilience–corporate finance" but also provides empirical evidence for investors to assess climate physical risks, regulators to formulate climate finance policies, and firms to optimize climate risk management.