Framework for Approaches to Hedging Climate Risk

Details

Author(s):
  • Megan Starr
Publish Date:
May 26, 2015
Publisher:
Steyer Taylor Center for Energy Policy and Finance
Format:
Other
Citation(s):
  • Megan Starr, Framework for Approaches to Hedging Climate Risk, Steyer Taylor Center for Energy Policy and Finance, May 2015.
Related Organization(s):

Abstract

While organizations have hedged their investments for decades – multinationals hedge currency risk through forward exchange contracts, and airlines utilize futures contracts to hedge the price of fuel – these instruments have typically focused on traditional types of financial risks: those of currencies, commodities, stocks, and volatility, amongst others. In recent years, however, there has been an increasingly prominent new type of risk to businesses that is prompting an emerging discussion about how investors can hedge against potential losses from it. This is the risk imposed by climate change. While there are myriad ways in which climate can impact a business, or, by extension, an organization invested in that business, it is useful to group these risks into three categories in order to discuss potential approaches for hedging each particular risk dimension. For the purposes of this paper, we choose to focus on how these risks can ultimately impact an investment portfolio.