Weather risk

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Weather conditions play a significant role in the yield of many agricultural productions and in the price of many commodities. As a result, the cost of goods is influenced by changes in weather conditions. Similarly, weather conditions dictate individual consumption behaviors. There are many examples of purchasing decision making process which are directly influenced by weather. In summer for instance, when the temperature is warmer than usual, people drink more. In spring, if the temperature is cooler than normal, people consume more energy to heat up their houses and do not buy the light summer clothes which are already on display in the shops. These individual consumer decisions add up and together have a very significant impact on the economy. The activity of many companies, small and big, in many sectors depends directly on actual or expected changes in weather conditions.

Energy, transportation, tourism, agriculture, food, textile, beverage, construction, cosmetics, local authorities are amongst the most weather-sensitive sectors. The financial result of a company which operates in one of these sectors can be boosted or slashed depending whether climate conditions are favorable or not. In industrialized countries, the sales of 7 companies in 10 are directly affected by weather conditions. The total exposure amounts to 30% of GDP. When the weather is normal, seasonal activity is in line with forecasts and expectations. Business managers know how to operate when they are no weather surprises. When the weather deviates unexpectedly from its normal seasonal value, there is a significant impact on sales or profitability which is impossible to anticipate.

2012 Weather anomalies

2012 Weather anomalies
Source: WMO Provisional Statement on the State of Global Climate in 2012

Weather risks arise when unusual weather conditions destroy or alter production, decrease sales volumes or push production or manufacturing prices higher.

The fact that weather has an influence on a lot of companies and economic sectors is not new. The new element is the fact that climate change is aggravating natural climate variability and has become a source of uncertainty for climate-sensitive sectors and companies. When the number and the intensity of weather increase, the risk for companies to experience a gap between the actual and the forecast financial result also rises. Similarly, weather-sensitive companies which are listed on the stock-exchange are more likely to issue weather-related profit-warnings.

Weather-sensitivity analysis

Weather-sensitivity analysis

Weather is an external risk which affects an entire business sector in the same way. Companies however are not all exposed in the same way and the financial consequences of weather anomalies can significantly differ from one company to another. The individual exposure of a company to weather depends on the geographical concentration of the business, both for supply and demand, its product mix, its ability to quickly adjust to new conditions and its level of integration of weather information in the day to day management. These elements have to be addressed so that business managers can implement efficient operational mitigation strategies or cost-effective financial weather hedges.