Scientific publications

Climate Interconnectedness and Financial Stability (2024)
Finance. 45: 145-195 (2024/1)
Miia Chabot, Jean-Louis Bertrand, Valentin Courquin
https://www.cairn.info/revue-finance-2024-1-page-145.htm

Summary

Climate risks directly affect a wide range of non-financial companies, and indirectly the financial institutions that lend to or invest in them. In this article, we explore the influence of climate risks on the financial stability of European financial institutions using network analysis and panel regressions. Determination of interconnection variables and graphical representations of climate networks allow us to identify systemically important financial institutions and risk concentrations. Our work contributes to the development of new macroprudential measures to capture climate risks and address climate-related risks from a systemic perspective.

Climate risks and financial stability: Evidence from the European financial system (2023)
Journal of Financial Stability. 69: 101190
Miia Chabot, Jean-Louis Bertrand
https://www.sciencedirect.com/science/article/abs/pii/S1572308923000906

Summary

Climate-related risks have become a major concern for financial regulators and can pose a significant threat to financial stability. In this article, we first propose a theoretical framework for the transmission of climate risks to financial institutions and the financial system. We then estimate the influence of physical and transitional risks on the European financial system through bank-level and system-wide measures of financial stability. Our analyses reveal that Scope 3 greenhouse gas emissions, as well as chronic and acute climate risks, adversely affect financial stability both at the level of financial institutions and the system as a whole. Temperature anomalies, heat waves, forest fires and droughts are among the most significant risks. At a time when Europe is warming twice as fast as the rest of the world, our theoretical and empirical results encourage regulators to mandate the assessment and disclosure of climate risks by companies, to enable banks to adjust their prudential capital requirements.

Protecting franchise chains against weather risk: A design science approach (2021)
Journal of Business Research 125: 187-200
Jean-Louis Bertrand, Xavier Brusset, Miia Chabot
https://www.sciencedirect.com/science/article/abs/pii/S0148296320308511

Summary

Franchisees are often small business owners whose sales, profitability and financial equilibrium in the first few years of operation are increasingly affected by the variability of weather conditions. The literature has analyzed the effectiveness of the various guarantees offered by franchisors in franchise agreements, but the case of covering the local weather risk to which each franchisee is exposed has never been addressed. Using design science, we show that franchisors operating in one of the industries making up the top 70% of weather risk exposures can support franchise development, measure their weather risk and incorporate financial protections against the consequences of adverse weather conditions into the franchise agreement. In so doing, they can reduce the risk of financial distress, provide an innovative service and strengthen the quality of the relationship with their franchisees.

Stock returns and weather: The case of European listed energy firms (2020)
Finance. 41(3): 51-92
Jean-Louis Bertrand, Miia Chabot
https://www.cairn.info/revue-finance-2020-3-page-51.htm?ref=doi

Summary

The influence of weather conditions on stock markets has mainly been studied within the framework of behavioral finance. Using a weather-extended CAPM applied to European energy companies, we show that weather information has little influence on returns, and highlight significant market inefficiency due to a weather lag effect. We find that the error between expected and observed yields decreases by an average of 20% when using the weather-extended CAPM compared to the traditional CAPM. As climate variability increases, these results should encourage analysts to take into account the impact of weather conditions on the stock returns of the 70% of companies exposed to weather conditions.

Understanding the economic effects of abnormal weather to mitigate the risk of business failures (2019)
Journal of Business Research 98: 391-402
Jean-Louis Bertrand, Miia Chabot (Parnaudeau)
https://www.sciencedirect.com/science/article/abs/pii/S014829631730334X

Summary

Hot or cold, wet or dry, the weather has an impact on almost every business sector, with 70% of companies exposed to unexpected variations that influence demand for goods and services. Financial losses caused by adverse weather conditions, which didn't seem significant enough to have an impact or to require management ten years ago, may now do so, as the frequency and severity of abnormal weather conditions have increased dramatically. The increasing reliability of weather data and the development of new risk mitigation tools have also multiplied the number of studies into the contribution of weather to financial distress. Drawing on the UK retail sector for empirical evidence, this paper proposes a methodology for determining the contribution of weather to sales and for structuring financial products to reduce the impact of adverse weather on forecast cash flows. Our results open up new research perspectives for weather conditions to be considered as an additional cause of business failure.

Hedging weather risk and coordinating supply chains (2018)
Journal of Operations Management. 64:41-52
Xavier Brusset, Jean-Louis Bertrand

Abstract

The sales of many products can be influenced by weather conditions, positively or negatively. For the manufacturers in question, one of their entrepreneurial risks is to incur lower than expected sales because of adverse weather conditions. The variability of weather conditions is expected to continue to rise because of climate change. Manufacturers can choose to do nothing and suffer the financial consequences, or transfer the weather risk partly or wholly to others. This paper presents an approach to transfer weather risks to risk takers and reduce sales volatility using weather index-based financial instruments. In our approach, the risk of adverse weather conditions is calculated on the basis of adverse conditions observed in the past. We do not use forecasts of weather conditions. We illustrate our action design with case studies of three companies: a company manufacturing automotive replacement parts, a clothing company and a company producing of sunscreen products. We demonstrate its efficiency in reducing cash-flow uncertainty and potential losses caused by adverse weather, and in influencing sales to the next tier.

The contribution of weather variability to economic sectors (2018)
Applied Economics. 50(43): 4632-4649
Miia Chabot (Parnaudeau), Jean-Louis Bertrand

https://www.tandfonline.com/doi/full/10.1080/00036846.2018.1458200

Abstract

Every day, people make economic decisions based on the weather, affecting sales of companies in a wide range of economic sectors. In many cases, the impact of weather on sales is not constant from one season to the next. Yet, the existing research to estimate the influence of temperature on annual sales has not analysed the relationship per season, resulting in potential washout effects and underestimated weather impacts. Drawing upon French economic sectors for empirical evidence, we break down the analysis of the relationship between weather and monthly sales by season. Our methodology provides the cumulative annual contribution of weather to sales and allows deriving the maximum potential annual impact of adverse weather. With our results, analysts and risk managers can better understand the exposure to abnormal weather and consider the potential benefits of mitigating weather risk using the weather parameters we identify to structure bespoke index-based financial instruments.

Managing the financial consequences of weather variability (2018)
Journal of Asset Management. 19: 301-315
Jean-Louis Bertrand, Xavier Brusset
https://link.springer.com/article/10.1057/s41260-018-0083-x

Abstract

Cool summers or warm winters affect sales of scores of products of all businesses operating in the 70% of activity sectors that are exposed to weather variability. The renewed interest in investigating the role of weather on business activity is prompted by the development of the weather index-based financial market, fostered by increasing weather variability and more reliable weather data. Drawing on the case of a manufacturer of sunscreen products, we model the influence of weather on sales in a way that supports the implementation of index-based financial cover. We evaluate the maximum potential sales loss caused by adverse weather, construct a weather index-based cover, and demonstrate its effectiveness in reducing sales variability. Knowledge of models that link weather and sales allows analysts and asset managers to better understand the contribution of weather to sales, to anticipate its effects on financial performance, and to implement risk mitigation strategies.

Severe Weather Threatens Businesses. It's Time to Measure and Disclose the Risks (2017)
Harvard Business Review
Jean-Louis Bertrand, Miia Chabot (Parnaudeau)
https://hbr.org/2017/09/severe-weather-threatens-businesses-its-time-to-measure-and-disclose-the-risks

Summary

Existing research has failed to provide managers with a clear and usable understanding of their exposure to weather variability. One of the reasons for this was the lack of access to reliable historical weather data needed to model the exposure of individual companies to weather risk. This is no longer the case. Big data and cloud computing make it possible to store and manage the huge quantities of weather data needed to assess weather risks anywhere in the world, set prices and deliver customized hedging products via internet platforms in a timeframe acceptable to customers and hedging vendors alike.

Our research focused on how companies can manage weather-related risks, including estimating potential losses and their likelihood, and using financial instruments to hedge against this risk. Drawing on empirical data from UK retail sectors, we developed a methodology for assessing and hedging sales exposure to weather risks. In doing so, we discovered that weather conditions have a greater impact on sales than previously estimated. Unsurprisingly, risks vary considerably from one sector to another. Finally, our estimates suggest that weather risk hedging could help companies avoid the very real possibility of weather-related financial distress.

No more blaming the weather: a retailer's approach to measuring and managing weather variability (2017)
International Journal of Retail & Distribution Management. 45 (7/8): 730-761
Jean-Louis Bertrand, Miia Chabot (Parnaudeau)
https://www.emerald.com/insight/content/doi/10.1108/IJRDM-09-2016-0152/full/html

Summary

In this paper, the authors produce a detailed analysis of each retail sector's exposure to non-seasonal weather conditions. This is the first time that all retail sectors have been analyzed and classified by season at national level. The authors provide managers with actionable information to improve their understanding of the impact of weather conditions on sales during each season, and to enable them to structure instruments based on weather indices with financial partners.

Assessing and hedging the cost of unseasonal weather: Case of the apparel sector (2015)
European Journal of Operational Research. 244: 261-276
Jean-Louis Bertrand, Xavier Brusset, Maxime Fortin
https://www.sciencedirect.com/science/article/abs/pii/S0377221715000326

Summary

Retail operations are increasingly exposed to unseasonal weather conditions that lead to lost sales and profits, as climate change exacerbates climate variability. While research has led to a better understanding of the role of weather on consumption, little is known about the precise relationship between weather and sales for strategic and financial decision-making. Using apparel as an illustration for all seasons, we estimate the impact on sales caused by unexpected deviations in daily temperature from seasonal patterns. We apply seasonal trend decomposition using Loess to isolate changes in sales volumes. We use linear regression to find the relationship between temperature and sales anomalies, and construct the historical distribution to determine sales at risk due to unseasonal weather conditions. We show how to use weather derivatives to offset the potential loss. Our contribution is twofold: we provide a new general method for managers to understand how their performance is linked to weather conditions, and we propose a tailor-made weather derivatives model to mitigate this risk.