As extreme weather bites, Wall Street finds new ways to speculate
Plus, why the SEC may never get its new climate disclosure rules adopted.
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Back in my early reporting days covering the Chicago Board of Trade in Chicago, old-timers used to point up to the windows on the original trading floor looking down La Salle Street and talk about how the weather sometimes dictated trading prices. If they saw it raining outside, for example, that could impact crop futures.
Investors have been trading the weather for as long as there’ve been financial instruments. Orange juice futures. Dutch coffee. Farmers used to hedge their crops by buying contracts on the CBOT.
These days, with climate change hitting hard, weather derivatives are a booming business, and some financial firms — and exchanges — are cashing in. Average trading on listed contracts on the Chicago Mercantile Exchange more than tripled last year, and the notional size of the market is now about $25 billion, according to Bloomberg.
That’s tiny compared to the oil futures market, which is estimated at about $2 trillion. But the point is that as weather becomes more extreme, investors are finding ways to hedge their bets, or speculate on what might happen. We’ve written before about catastrophe bonds. But this is a growing new area — much like the old but with new contracts that speculate on weather around the world.
Some might say this is Wall Street’s way of making a game out of climate change. But with extreme weather poised to have a devastating economic impact on business and economies going forward, it only makes sense that those who might get hit will look for ways to protect themselves. And others to find ways to profit.
The only thing to watch for, as with all derivative markets, is signs of abuse, manipulation, or over-leverage — which we’re sure will come in time.
Don’t forget to contact me directly if you have suggestions or ideas at dcallaway@callawayclimateinsights.com.
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Waiting for companies’ climate data? Don’t hold your breath
. . . . Too often in Washington, enactment of a regulation or a law is treated as the end of the ballgame when it’s really just the fourth or fifth inning. Such is the case with the Securities and Exchange Commission’s new climate disclosure law, which passed on a 3-2 vote earlier this year, writes Bill Sternberg. As predicted, almost a dozen lawsuits were filed almost immediately, casting the new law’s fate into doubt and leading some to speculate it may never get implemented. For a step-by-step look at what happens next, investors and corporate executives should check this out. . . .
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The fastest growth of an energy source
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Iceland punches above its weight when it comes to renewables
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Watch the video: While many of the effects of climate change, including heat waves, droughts and wildfires, are already with us, some of the most alarming consequences are hiding beneath the surface of the ocean. David Gelles and Raymond Zhong, who both cover climate for The New York Times, explain just how close we might be to a tipping point.
Execs thinking more about sustainability and decarbonization
CEOs and senior executives around the world are focusing more on sustainability and climate issues, according to a new survey released by global professional services firm EY. According to a report from ESG Today, execs say sustainability is a higher priority now than it was a year ago, and decarbonization is the top long-term strategic priority. For the study, EY’s CEO Outlook Pulse Survey, EY surveyed 1,200 CEOs from large companies across 21 countries and five industries, as well as 300 institutional investors in 21 countries. The surveys were conducted by FT Longitude on behalf of EY. The survey says 54% of CEOs reported that sustainability is being given a higher priority by them and their boards than it was last year. Some 23% said that sustainability has been deprioritized at their companies, mostly due to challenging economic or financial circumstances. Respondents in the Americas were the most likely to report that sustainability has become a higher priority, at 62%, and the least likely to report de-prioritization, at 16%.
Latest findings: New research, studies and projects
The promise of green technologies
To combat climate change without sacrificing long-term economic growth, innovation must be redirected toward green technologies. The authors of this Peterson Institute for International Economics Working Paper, titled Green Innovation and the Transition Toward a Clean Economy, review recent literature that has developed a directed technical change framework where innovation can be endogenously targeted either toward fossil-fuel enhancing technologies or clean energy sources (such as renewables). They provide empirical evidence of path dependence in firms’ choice between green and dirty innovation. They then draw implications of this path dependence for the design of environmental policy and for economic growth. In particular, they show that their framework has distinctive implications regarding unilateral environmental policies, international cooperation, the use of intermediate energy sources such as natural gas, and the role of civil society. Authors: Daron Acemoglu, Massachusetts Institute of Technology Department of Economics, Centre for Economic Policy Research, National Bureau of Economic Research; Philippe Aghion, London School of Economics & Political Science; Lint Barrage, ETH Zürich; David Hémous, University of Zürich; Centre for Economic Policy Research.
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Are Solar Panels and Electric Vehicles Substitutes or Complements?
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Words to live by . . . .
“Are you going to listen to the wind, or are you going to wait for floating lilies to deliver seeds of condolences?” — Malebo Sephodi, South African writer and researcher.