2024-05-05 16:50:25
Until recently, the mother of Marty Malinow, founder and CEO of Parameter Climate, had a hard time explaining what her son does. He said he was a stockbroker, dealing with something to do with the weather. And that’s how he himself described his work, since he knew that most people have no idea about specialized financial products that depend on sunshine, rain and winds.
That is starting to change a bit, as pointed out in a Bloomberg report. As the climate crisis has entered our lives for good and weather volatility is the new “constant”, causing economic and social impacts, the demand for weather derivatives has soared.
Soaring demand in the last year
The average trading volume for such products increased by more than 260% through 2023, according to data from brokerage group CME Group. According to market estimates, weather-related derivatives are already worth $25 billion. And the prediction is that this value will multiply rapidly in the coming years.
“There’s a lot of upside for our industry right now,” Malinow tells Bloomberg. “Increased vulnerability to weather volatility, the problems it causes in the supply chain, the impact on inflation and even geopolitical developments – all of these are boosting demand.”
Catastrophe bonds and other hedging derivatives
The best-known weather-related products at the moment are so-called catastrophe bonds, high-yield bonds designed to raise money from insurance companies in the event of a natural disaster.
However, there are also derivatives that offer protection against less severe meteorological threats. For example a weather derivative can offer compensation to a tourism business or a farmer if the year turns out to be too rainy and their business is affected.
The new opportunities
Most large and listed European companies are now required to disclose what they see as risks and opportunities from environmental factors.
In the US, the Securities and Exchange Commission (SEC) unveiled a plan in March that would make it mandatory for companies to publish information describing climate-related risks that may affect their business, as well as any mitigation measures they have taken .
These initiatives at the regulatory level essentially “push” companies to think about shielding themselves with such financial hedging products.