Climate change has emerged as one of the biggest threats to the stability of our planet, with severe and far-reaching impacts on various sectors, including agriculture, water resources, infrastructure, and ecosystems. Global supply chains stand as one area particularly vulnerable to climate change’s impacts.
As extreme weather events and other climate-related phenomena threaten to disrupt traditional supply chain networks, companies must focus on building climate resilience into their supply chains to ensure long-term sustainability and success.
According to Deloitte, if left unchecked, climate change could cost the global economy USD 178 tn in net present value terms from 2021-2070. However, the human costs could be far greater, leading to a lack of food and water, a loss of jobs, worsening health and well-being, and a reduced standard of living.
Over the last few years, the Intergovernmental Panel on Climate Change (IPCC) has issued increasingly stark reports, making it clear and indisputable that climate change is impacting every nation across the globe.
A new field of climate science research known as “extreme event attribution” has emerged, exploring the human impact on extreme weather, such as droughts, heatwaves, and storms. Carbon Brief has mapped and analyzed how climate change affects extreme weather around the world. Their analysis revealed that 71% of the 504 extreme weather events and trends included in the map were found to be made more likely or more severe by human-caused climate change.
Figure 1
Extreme Weather Events Around the Globe
In 2023, the International Disaster Database recorded a total of 399 natural disasters, of which 240 were climate related. The Centre for Research on the Epidemiology of Disasters (CRED) estimates these disasters worldwide resulted in economic losses of USD 202.7bn, while Munich Re assesses overall losses of about USD 250 billion.
From unprecedented floods in the Middle East to record-breaking heatwaves in Southeast Asia in the first half of 2024 alone, extreme weather events are being seen around the world. According to the Environmental Protection Agency (EPA), scientific studies indicate that extreme weather events will likely become more intense or more frequent with human-induced climate change.
So, what does this mean for your supply chain?
Areas of Risk
For ease of discussion, we have split the impacts of climate change into two areas of direct risk—physical (includes logistical and operational risk) and transition (includes economy’s transition to more sustainable practices and changing consumer demand). However, it is worth noting that discussions of risk often intertwine, it is important to consider all areas of potential impact, including increased costs, quality and regulatory compliance risks, and the possibilities of changing market conditions or increased political instability.
For many companies, rising risks will fall well into critical supply chains and involve public infrastructure such as railroads and ports. Therefore, mitigation plans may need to be managed in partnership with the public sector and in concert with value chain partners.
Logistical and operational risk
Climate change is expected to worsen the intensity, frequency, and impact of some types of extreme weather events, increasing the likelihood of supply chain disruptions.
Extreme weather events like wildfires and floods or shifts in climate patterns such as increased average temperatures and rising sea levels may exacerbate logistical and operational risk, including business interruption losses as well as physical damage to commercial buildings and material assets such as trucks and machinery.
Although risks will be specific to industry and geographical area, and we cannot list them all, here are a few examples of potential threats to consider, both within your own operations and your supply chain:
- Violent storms and floods can damage transportation infrastructure and disrupt shipping routes.
- Droughts can reduce crop yields, leading to food shortages and price spikes.
- Hurricanes may damage factories and warehouses, leading to supply chain delays and product shortages.
- Wildfires can damage forests and disrupt logging operations, leading to reduced timber supplies.
For those in certain sectors, such as pharmaceuticals and mining, that require water as a critical input, events that affect water supply and demand, such as droughts, flooding, or changing precipitation patterns, can be an important stressor and a high point of vulnerability.
Of course, safety remains of utmost concern as health care and loss of life are the most critical risks associated with extreme weather events.
Figure 2
Transition risks; Changing consumer demand
As new, more sustainable options are increasingly supported by public policy and delivered to the market, consumer preferences and buying habits may begin to shift, representing a transition risk. For example, growth is expected in the adoption of electric vehicles, which will trigger demand for associated charging infrastructure and threatens to cannibalize the market share for gas and diesel-fueled cars.
As we make our way to net zero and transition to a lower-carbon economy, assets may be left stranded, causing premature financial write-down as a shift in demand means the item no longer expects any financial return, as may be the case with fossil fuels.
Climate Resilience
Due to scientific uncertainty and the long timeframes involved, assessing climate risk on its own can prove difficult. Risk management requires hard data to evaluate potential impacts and assign appropriate mitigation measures. But when it comes to climate change, that kind of data can be hard to find at the level of granularity needed to assess risk properly.
For instance, climate model projections are often at the regional, national, or global level rather than location-specific, as would be needed for risk assessments and contingency planning. Instead, if climate change is considered at all, it is most often viewed as a magnifier or multiplier and follows the same framework as existing resilience and risk management plans.
However, technology and strong partnerships within the supply chain offers significant opportunities for more mature risk management and real-time supply chain risk monitoring.
One technology that is gaining attention for its potential to enhance supply chain resilience is quantum computing. Quantum computing refers to the use of quantum-mechanical phenomena, such as superposition and entanglement, to perform computations that are beyond the capabilities of classical computers. This technology has the potential to revolutionize supply chain risk management by providing real-time insights into the impact of climate change on different parts of the supply chain.
For example, quantum computing can also be used to simulate various scenarios of climate change impacts and model the impact of extreme weather events on transportation routes and identify alternative routes that can be used to ensure the timely delivery of goods.
Moreover, developing longer-term supplier relationships which is built around trust and collaboration will also help towards building climate resilient supply chains. For example, committing to longer supply contracts allows more time to gain influence with the supplier(s). By doing so, they can be encouraged to establish comprehensive emergency protocols and response mechanisms, strictly comply with Environmental, Social, and Governance (ESG) standards and be a partner to support decarbonization processes throughout the supply chain.
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Conclusion
The term “you’re only as strong as your weakest link” is often used to emphasize the imperativeness of risk awareness and gaining visibility into your supply chain.
Although there is no rubric for climate resilience, and appropriate strategies are dependent on company specifics, mapping your supply chain is a critical first step in garnering the visibility required to identify, assess, and manage climate-related vulnerability points.
Climate change is creating new challenges for global supply chains, but it is also presenting opportunities for innovation and collaboration. Companies that focus on building climate resilience into their supply chains will be better positioned to succeed in a rapidly changing world.
By diversifying supply chains, collaborating with partners, and leveraging technology, companies can mitigate the risks of climate change, ensure long-term sustainability, and align with consumer expectations.
For more on the impact of climate change on global supply chains, see DP World’s latest whitepaper on ‘Climate-Proofing the Supply Chain – Using data to enhance infrastructure resilience’.
