Jo Bates’ work on the Big Data driven financial markets being developed in response to climate change has been published by The Conversationand New Statesman. Read more below.
|Big agriculture, big data, big weather. Chemophilia|
A new generation of data analytics firms are emerging, using innovations in the field of data science in order to turn vast datasets (‘Big Data’) into exploitable information. As the Financial Times reported, Monsanto’s purchase of Climate Corporation signals the ‘first significant acquisition’ of this emerging ‘Big Data’ industry.
Climate Corporations’ key offering is a product called ‘Total Weather Insurance’ (TWI), which it currently sells directly to farmers in the USA. TWI pays out based solely upon observed weather conditions, rather than crop damage.
In order to calculate the price of policies and pay-outs, Climate Corporation data scientists analyse three million new data points a day from 22 datasets using advanced ‘Big Data’ analysis techniques. The data comes from a range of third-party providers such as the US National Weather Service, which publishes its data free for re-use.
Whilst Total Weather Insurance is a new form of financial product being sold direct to farmers, what underlies it is not new. Weather derivatives were developed in the US energy industry by Enron, Koch Industries and Aquila in the mid-1990s. Weather derivative contracts, which also depend on ‘big’ weather data analytics, can be traded across any type of weather; however the most popular by far are based on the divergence of the average daily temperature from 18 degrees.
The mid-2000s saw massive growth in the weather derivatives market, but it crashed alongside everything else in 2008. However, the Weather Risk Management Association is hopeful for weather derivatives, pointing to continuing growth outside the US markets throughout the downturn, growing interest in non-temperature-related weather derivatives, and increasing interest from outside the energy industry.
Until recently, UK traders had to purchase weather data from the Met Office in order to conduct forecast analyses and price weather derivatives contracts. However, in 2011, the new coalition government yielded to the demands of the financial services lobby for freely re-usable weather data and announced that, as part of its Open Government Data initiative, “the largest volume of high quality weather data and information made available by a national meteorological organisation anywhere in the world” would be opened for anyone to re-use without charge.
Crucially, these developments expand the range of players with a financial interest in continuing climate instability. Whilst the claim is often made that weather derivatives and similar products balance out the financial impact of weather on affected businesses, thus smoothing adaptation to climate change, serious political-economic questions do arise about who actually benefits from these financial products and this use of ‘Big Data’ analysis.
The model of paying out based upon observed weather means, in effect, placing bets on future weather conditions – rather than a business insuring itself against a specific loss. Clearly, during a time of instability in global weather, there is a lot of potential profit to be generated from such financial products. The emergence of this developing ‘Big Data’-driven weather derivatives and risk market is, therefore, troubling.
It exploits common threats in order to generate private wealth and favours those in a financial position to protect their interests at the expense of those most vulnerable to climate instabilities. Most dangerously, this practice could reduce the incentive for those profiting from these markets to engage in action to mitigate climate change.