Exploring the influence of financial development on climate physical risk: insights from China

Pengyu Chen, Yali Zhang and Zhongzhu Chu

Climate Policy, 2025, vol. 25, issue 2, 223-239

Abstract: Introduction: Currently, extreme weather events and natural disasters are occurring frequently, and countries around the world are facing a variety of physical climate risks. More and more countries are attempting to embed financial tools into the process of climate risk governance. However, the financial strength of developing countries is insufficient to enhance regional resilience to physical climate risks. Moreover, existing literature mainly focuses on the impact of financial development on greenhouse gas emissions, neglecting its crucial role in adaptation. Discussion: The present study enriches people's understanding at the national level of whether and how financial development is affected by physical climate risks. Additionally, it provides significant reference for financial reforms and physical climate risk governance in other countries and regions from the perspectives of inclusive finance and green finance, utilizing econometric methods. Conclusion: (1) Financial development effectively facilitate the governance of physical climate risk. (2) Green finance and inclusive finance intensify the negative effect of financial development on physical climate risk. (3) Financial development can governance physical climate risk by bolstering technological innovation. (4) Financial development significantly promotes physical climate risk governance only in regions with large populations, resource abundance, well-developed insurance sectors, and strong governmental intervention.Key policy insights Green finance and inclusive finance enhance the positive effect of financial development on physical climate risk governance.Financial development is conducive to the improvement of local technological innovation capabilities, which can help govern physical climate risk.The effective governance of physical climate risk by financial development only occurs in regions with large population size, resource endowment, insurance payout, and the degree of government intervention level.

Date: 2025
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DOI: 10.1080/14693062.2024.2374319

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