Market Profile: Weather Derivatives in Switzerland
A qualitative analysis on prerequisites for an active market
As a result of climate change, the weather is becoming more relevant for a broad variety of companies in different industries. Companies depending on a certain weather resistance are confronted with unexpected consequences and risks due to increased weather fluctuations. Major variances in temperature may cause instable revenue flows with the associated financial risks.
A study conducted by the University of Lucerne together with Zanders assessed the sensitivity and potential of weather-related financial instruments, especially weather derivatives, in Switzerland. Although existing studies have aimed to sensitize corporates on how the weather can affect their business's success, with products or financial instruments tailored to mitigate these risks, companies still ignore weather related risks to a large extent.
In Switzerland, the supplier side is mainly covered by a joint venture of SwissRe and CelsiusPro. Banks were in the business for a couple of years, but have withdrawn their products from the market in the meantime. Back in 2009, Eurex Exchange integrated a new asset class in their product range, so-called Hurricane Futures. In addition to that, storm damage futures have been tradeable since January 2011 as well. However, weather derivatives are not yet tradeable on the Swiss Stock Exchange. Overall, the market for weather derivatives and certificates in Switzerland is still at an early stage and has to overcome some obstacles and difficulties. Despite increased trade volumes in weather related financial instruments, the proportion in comparison to conventional derivatives is still very low.
The demand side is mainly covered by the energy & utilities, construction, tourism & leisure time, gastronomy, and the transportation industries. The study of these industries has indicated that weather derivatives or certificates might be a viable way of hedging against weather risks. It recognized a growth potential in the Swiss market while acknowledging additional factors such as the opportunity to gain experience and knowhow, having liquidity in the market to trade at the stock exchange, getting support from senior management, and receiving more insights from the audit companies and regulator etc.
Interestingly, the aforementioned industries do report on or at least mention weather influences in their financial reports, but do not want to disclose a qualitative and/or quantitative opinion from a financial risk perspective. At this stage, there are no disclosure requirements released from an audit company, let alone available from the regulator. The companies are responsible for the steady increase of their own level of information in the future. A comment from the International Accounting Standards Board (IASB) gave an indication of the priorities for most companies in this respect: “…the primary focus of management commentary is to meet the information requirements of investors…”
So again, it will be exciting to follow the next developments in the area of weather-related financial instruments.