TP Icap Launches Climate Index

While weather derivatives have long been a part of financial markets, and climate-related trading is on the increase, TP Icap has announced the launched of what it says is a first in this arena, an index that uses global weather data to track climate change.

The firm says the Icap-Speedwell Climate Index, created with environmental risk management solutions provider Speedwell, has been launched to provide a reliable data source from which market participants can make better informed investment and hedging decisions. This in turn will enable the market to better manage financial risks associated with climate change, the firm says.

Developed and maintained by Speedwell, the Index takes a representation of the average global temperature based on data taken from 50 independent national weather stations from around the world. Designed to meet the needs of financial risk transfer, it provides the underlying data necessary for market participants to transact, tailored structures relating to climate change using over-the-counter futures and options, the firms say.

As with a financial future or option, the Index will enable counterparties to create structures with varied payoffs over specific periods of time. Such transactions will enable the Index to provide a correlation between the global temperature change and financial risk appetite.

“We understand that many companies have significant and sometimes unquantified exposure to weather and climate risk,” says Nicholas Ernst, managing director, weather markets, at TP Icap. “The first step in managing these exposures is to identify an index which can be used to quantify and then hedge these risks. This innovation is key in being able to develop hedging strategies relating to climate change.

“The introduction of the Index has the ability to dramatically change how people calculate the financial impact of global climate change, providing comprehensive data to quantify the impact of future temperature changes for the first time,” he continues. “Climate change is a significant financial risk and quoting markets in this way is an important step in not only measuring that risk, but also understanding the cost of climate change as we move towards a low-carbon economy.

“At TP Icap, we apply our unique capabilities to provide clients with the tools they need to meet their sustainability objectives,” he adds. “We aim to be the leading broker for the transition to an inclusive and low-carbon economy; the launch of this Index marks a step forward in this ambition.”

David Whitehead, co-CEO, Speedwell Weather, adds, “The Index has been designed specifically for financial transactions. Historical data will be made available for pricing and structuring; forward curves, market prices, and index forecasts will be available for managing risk, and certified settlement data for final settlement of open contracts.”