This study, guided by a social-ecological perspective, examines the direct link between social climate and the overall adjustment difficulties of adolescents in residential care settings (RCSs), as well as the mediating role of physical victimization by peers in this link. Structured, self-report, anonymous questionnaires were completed by 1324 Israeli Arab and Jewish adolescents, aged 11 to 19, residing in 32 RCSs for children at risk. The mediation model was performed using bootstrap in SPSS. The findings reveal a negative significant association between the adolescents’ perceived social climate (which included the following aspects: staff support, staff strictness, children’s behavior, children’s friendliness, and satisfaction with the RCS) and overall adjustment difficulties, as well as a negative significant association between social climate and peer physical victimization experiences in the RCS. In addition, it was found that peer physical victimization experiences have a mediating role in the link between social climate and adjustment difficulties. In other words, the path between the RCS social climate and adolescents’ adjustment difficulties is weaker after including the mediating influence of victimization by peers. The results of the current study emphasize the need to examine the contribution of various characteristics of the stay experience, rather than focusing solely on personal characteristics and family history to enhance our understanding of the variance in adjustment difficulties of adolescents in RCS.