by Jean-Louis Bertrand, Chair, Banking and Finance Department, ESSCA
A recent survey conducted by the French business school ESSCA and AFTE, the French Association of Corporate Treasurers, showed that a vast majority of corporates have not put in place any policy to manage the financial impact of day to day changes in climate variables. Paradoxically, however, the study showed that the same corporates recognise that day-to-day weather changes have a significant financial impact on their turnover.
Weather risks are often associated with catastrophic events such as tornados, hurricanes, flooding or long-lasting drought. Global warming and greenhouse gas may cause these dramatic events which serve as brutal reminders of how climate can suddenly and violently affect economic activities in a given area. But weather changes do not have to be extreme to impact the activity of many companies and sectors. Many studies have proved it, yet very few finance managers seem to have integrated climate variables into their overall risk management policy.
Our study showed that 95% of respondents had not implemented any climate change hedging programme and 88% had no plans to do so in the near future. Yet 76% of them conceded that climate variables significantly impact the turnover and/or the results of their company. This is hard to justify in an environment where financial markets, analysts and investors have little tolerance of risks and uncertainties.
Surveyed companies explain the current situation by the fact that it is easy to identify, and quantify the financial impact of foreign exchange or interest rate changes using standard sensitivity analysis. The financial consequences of a change in temperature or rainfall are much harder to assess and often need a difficult preliminary study. Even if this is carried out hedging is still not straightforward. The only protections that exist for beginners in the field are insurances – mostly for catastrophic events: high risk but low probability. Weather risk management is about low risk, high probability events, and these are covered in some cases by weather derivatives.