ORIGINAL ARTICLE Managing the ﬁnancial consequences of weather variability Jean-Louis Bertrand 1 • Xavier Brusset 2 Revised: 1 June 2018 Ó Macmillan Publishers Ltd., part of Springer Nature 2018 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 antici- pate its effects on ﬁnancial performance, and to implement risk mitigation strategies. Keywords Weather sensitivity  Weather risk management  Decision making  Statistical model Introduction Weather is a powerful and widespread force that affects 70% of companies worldwide (Hanley 1999; Dutton 2002; Larsen 2006). Each year, the cost of unexpected weather variability exceeds €560 billion in Europe alone and is estimated to be US$2 trillion worldwide for businesses operating in retail, consumer goods, apparel, transporta- tion, utilities, or food processing, to name a few (Lazo et al. 2011). The 2015–2016 winter provides an illustration of how unusually warm temperatures across Europe and the USA have driven consumer spending lower, resulting in lower sales of many consumer goods, such as apparel (Gustafson 2016), a delayed launch of the spring season at H&M (Milne 2016), store closures, and job cuts (Swamy- nathan and Layne 2016). Although the connection between weather and sales has long been acknowledged (Steele 1951; Maunder 1968), research to measure exactly how the weather impacts sales is scarce (Dell et al. 2014). Some companies have started to take an empirical approach to look for weather patterns that trigger additional sales and thus launch timely adver- tising campaigns. Sears, for instance, noticed that car-bat- tery sales increase after three consecutive days of sub-zero temperatures, and so advertises on day 4 (WeatherUn- locked 2014). The release of smart menus by McDonalds or weather-related sales promotions by Campbells are also illustrative of this shift to try to seize opportunities pre- sented by the weather. Analyses of extreme or severe events on speciﬁc industries or products have demonstrated the role played by one or two weather variables (Agnew and Thornes 1995; Agnew and Palutikof 1999; Dell et al. 2014; Cachon 2004; Rossello ´-Nadal 2014). What has yet to be qualiﬁed and quantiﬁed is the signiﬁcation of variations in everyday & Jean-Louis Bertrand jean-louis.bertrand@essca.fr Xavier Brusset xavier.brusset@skema.edu 1 ESSCA School of Management, Angers, France 2 Skema Business School, UCA, Lille, France J Asset Manag https://doi.org/10.1057/s41260-018-0083-x