Abstract for: Why Firms Don’t Adapt: Financial Logic, Coping, and Climate Risk Lock-in

Firms increasingly identify material climate risk through tools such as TCFD disclosures, yet often fail to undertake structural adaptation. This paper examines this gap through the case of a coastal manufacturing firm that acknowledges rising hazard exposure but continues to rely on operational coping strategies. The puzzle is not informational or behavioral failure, but the persistence of underinvestment despite recognized and economically material risk. We develop a system dynamics model of firm-level capital allocation under climate risk, grounded in institutional financial logic. The model captures three reinforcing mechanisms: competitiveness pressures that penalize adaptation costs, coping substitution that suppresses risk salience, and perception–governance delays. Climate uncertainty enters as changing hazard trajectories and ambiguous risk signals. We extend the model to include liquidity constraints, accounting classification effects, and secondary market discounting of non-resilient assets. Simulations show persistent lock-in to non-resilient capital even under correct risk perception and positive expected value of adaptation. Operational coping stabilizes short-term performance while increasing long-term fragility. As hazard intensity rises, financial slack declines and governance capacity lags, further reducing adaptation feasibility. When secondary markets begin discounting non-resilient assets, the resulting increase in cost of capital can either unlock or deepen the trap depending on timing relative to loss events. The findings suggest that underinvestment in climate adaptation is structurally induced by financial classification and valuation regimes rather than misperception or myopia. Firms optimize within institutional rules that render resilience investments non-viable under competitive pressure. This reframes adaptation failure as an outcome of institutionally structured rationality and links firm-level investment dynamics to emerging evidence on the pricing of physical climate risk in financial markets.