heard it all now: hedging on climate change

green hedge funds

Whatever you may think about hedge funds, it's one way to 'win' whatever happens.

Just so with climate change, though it's hard to imagine what the 'win' looks like in our worst-case scenario for global warming.

I mean, so what if you 'win' another fortune betting on companies trying to solve climate change if "it all comes down to smoke and ash"?

Still, there are new hedge funds just for these purposes, and they're ironically called 'hyrbrid derivatives'. Specifically, in this case, 'weather derivatives'.

One such was launched last week by UBS, based on the first 'Global Warming Index' (via financial times).

This is a trading mechanism for the "businesses most affected by the uncertainty of climate change (from ice-cream salesmen to makers of winter coats) to hedge their profits against it in a simple and transparent fashion. Retail and institutional investors will also be able to buy exposure to, or short sell, the index in much the same way they would with the FTSE or Dow Jones stock indices. If temperatures rise, so will the value of the index."

UBS says the "impact of global warming has brought explosive growth in the weather derivatives market."

A recent report from PwC said the volume of weather derivatives traded on the Chicago Mercantile Exchange (CME) jumped from $9.7bn in 2004-5 to more than $45bn in 2005-6.

The index is based on weather derivative contracts for winter and summer traded on the CME. These "heating degree day" and "cooling degree day" contracts measure the difference between average daily temperatures and a given base in a number of cities round the world.

Seems like another example of how our inherited financial system gets most absurd when taken to its logical extreme.

Published by Ken on April 28th, 2007 tagged Climate Change, Systems Thinking

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