Weather may influence the financial performance of many industries, local government and households. It has been reported that weather impacts one third of the economy while weather effects may determine in the US a change in monthly employment data by more than 100,000 in either direction. Furthermore, uncertainty around climate legislation should be understood to be an increasingly important risk factor, with the potential to greatly affect government expenditure and decision-making, corporate profits and investors’ financial returns. Financial markets play several important roles in addressing climate change:
- Provide information and important inputs for economic and policy decisions (mitigation, adaptation, monitoring)
- Allocation of funds to sustainable investments and promoting technological transition (mitigation)
- Managing and sharing climate risks (adaptation)
The goal of this project is to address various problems around climate and weather risk with the use of climate derivatives – also known and as weather derivatives – a class of financial assets, and the role they play in determining how finance can contribute to a solution to the following questions:
Are climate risks reflected in asset prices? By how much? (monitoring)
How can we use financial markets to hedge or share climate risks? (adaptation)
How can information from financial markets be useful for climate decision-making?
