18-04-2024 - Pierre-Jean LACROIX

Snapshot on weather derivatives instruments.

In a world increasingly affected by #climatechange , it's crucial to understand the profound implications it holds for economies worldwide. From the Kyoto Protocol to the Paris Agreements, we've witnessed global efforts to combat climate change. Yet, the rise in weather, climate, and water extremes continues to impact us all, with staggering economic consequences.

In recent years, the European Union has introduced a series of regulations related to Environmental, Social, and Governance (#esg) topics. Specifically, following amendments to the #UCITSD and #AIFMD, Investment Fund Managers (#IFMs) must now identify, assess, and monitor sustainability risks, including climate risks. Despite efforts made by portfolio companies to align with the Paris Agreements or protect themselves against climate-related risks, there could remain a significant and inherent risk associated with weather conditions.

In his latest article, Pierre Jean delves deeply into this subject by shedding light on lesser-known financial instruments designed to hedge against climate risk, known as weather derivatives instruments. These financial instruments utilise weather parameters as underlying and primarily serve as hedging mechanisms against specific weather conditions that could have adverse impacts on the business activities and performance of portfolio companies.

Furthermore, his insights emphasise practical applications for weather derivatives, such as their potential use in wind farm projects within infrastructure funds. Drawing a parallel to some Private Equity Funds, which have aided some of their portfolio companies in hedging against rising energy prices using commodities, it is conceivable that these funds could extend their support to portfolio companies in helping them in utilising weather derivatives, despite the specialised skills required for effective implementation.

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