Climate Change and Weather-Sensitive Sectors

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  In Paper Session: Table 7

Abstract

Very unusual swings in the weather and climate are now being seen throughout the world, and the weather has become more unpredictable and unseasonal. During the 21st century, the frequency of unseasonable weather has increased, and the severity of weather events has become greater every year. In January 2018, despite global warming, a period of exceptionally cold and snowy winter weather occurred in the United States, Russia, and Europe, while Australia experienced an exceptionally hot summer with record-breaking temperatures.
At present, weather systems are chaotic and can be completely unpredictable. A chaotic system is not random, but the behaviour of the system can be very hard to predict. Nevertheless, the weather is an important characteristic for weather-sensitive sectors of the economy, and the weather should be considered in financial and business decisions. Moreover, it has been estimated that weather directly affects near 20 percent of any economy, and the impact can be felt in every sector.
The weather, climate, and other environmental information become key factors in business planning, pricing, risk management, and investment decisions. Better-informed decisions reduce risks and increase opportunities. Environmental risks need to be included in mainstream investment decision-making to obtain a balanced view of the entire risk.
A key objective of this research was to raise awareness of the environmental issues relevant to weather-sensitive sectors in regard to investment decision-making and the allocation of capital. To achieve this, this research developed a new model where environmental information is included in financial models. This model represents a market model that is extended by climate/weather variables. Historical financial and weather data were applied in a financial analysis to a market model and empirically examined for how much risk might be associated with weather variability. This new market model using environmental data is of great value to any weather-sensitive industry and allows market participants to consider these specific and unique risks.

Author

• Svetlana Vlady, Brooklyn College