TP ICAP group, one of the largest interdealer brokers in the world and Speedwell Group, a long-time specialist service provider to the weather risk management and parametric risk transfer market, have collaborated to launch a new climate index which aims to make financial risk related to the rate of climate change tradable.
The ICAP-Speedwell Climate Index has launched this week and is believed to be the first of its kind.
The ICAP-Speedwell Climate Index uses global weather data to track climate change, which means that financial risks related to the rate of climate change to be traded.
The idea behind the index is to provide a reliable data source so market participants can make better informed investment and hedging decisions, which is only going to become increasingly important as climate disclosures get integrated into regulation and oversight for corporations, investors and other entities around the world.
The Climate Index has been developed by Speedwell, using a representation of the average global temperature based on data sourced from 50 independent, high-quality national weather stations from around the world.
It’s been specifically designed to meet the needs of financial risk transfer, by providing the underlying data necessary for market participants to created and transact, tailored structures relating to climate change, using over-the-counter futures and options, the parties said.
As with any financial future or option, the Climate Index will allow counterparties to create flexible structures with varied payoffs over specific periods of time.
These transactions are expected to enable the Climate Index to provide a correlation between the global temperature change and financial risk appetite, the announcement explained.
The timing of the launch, before the COP 26 climate conference begins this weekend and when governments and regulators are acting on climate disclosure and driving home the urgent need for better financial tools to assist in hedging, transferring and managing financial risks related to climate is important.
It’s going to be fascinating to watch for the uptake of climate linked financial instruments and indices like this, as the world moves to better manage its climate exposure and a wide-range of entities could be potential users, including any that hold exposure to climate change and want to hedge some of that exposure.
TP ICAP expanded into offering weather derivatives a couple of years ago and is also well-known in the insurance-linked securities (ILS) space, having a prolific broking desk focused on catastrophe bonds and other tradable ILS and reinsurance related instruments.
Speedwell has a long-history in the weather risk management and risk transfer market, as a data and index provider, settlement agent and also a provider of weather data measurement and reporting infrastructure.
A tradable climate-data linked index could be of interest to some insurance-linked securities (ILS) funds, both as a hedging tool and for those investing in weather risk as an opportunity to put more capacity to work as a hedging counterparty, while others in the insurance and reinsurance market may also find a climate index like this valuable for similar reasons.
Nicholas Ernst, Managing Director, Weather Markets, TP ICAP commented on the launch, “At TP ICAP, we understand that many companies have significant and sometimes unquantified exposure to weather and climate risk. 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. 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. 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, added, “Speedwell has been involved in providing services to the environmental risk-transfer markets for over 20 years and so is delighted to now offer with TP ICAP a world-wide index that quantifies the direct impact of climate change on global temperatures.
“As with all Speedwell products 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.“