Understanding the economic effects of abnormal weather to mitigate the risk of business failures (2019)

Hot or cold, humid or dry, the weather has an impact on almost all sectors of activity, as 70% of businesses are exposed to unexpected variations that influence the demand for goods and services. The financial losses caused by unfavorable weather conditions, which did not seem significant enough to have an impact or to require management ten years ago, may now have one, as the frequency and severity of abnormal weather conditions have increased dramatically. The increase in the reliability of weather data and the development of new risk mitigation tools have also multiplied studies on the contribution of weather conditions to financial distress. Drawing on the retail sector in the UK for empirical evidence, this article proposes a methodology for determining the contribution of weather conditions to sales and for structuring financial products to reduce the consequences of unfavorable weather conditions on expected cash flows. Our results open new research perspectives for weather conditions to be considered as an additional cause of business bankruptcy.