Climate change, or long-term shifts in temperatures and weather patterns, has resulted in an increase in business-disrupting disasters such as hurricanes, floods, droughts, and wildfires. There are already many examples of these events disrupting global commerce; manufacturing facilities have been damaged, transport has been prevented, and resources have abruptly become unavailable. Rising sea levels, another potential side effect of climate change, can disrupt coastal infrastructure, including ports, and cause increased flooding, creating even more risk for supply chains. CDP, a global nonprofit focused on environmental impact disclosures, predicts that companies could incur up to $120 billion in supply chain environmental risk costs from 2021 to 2026.
A recent survey by the Harvard Business Review found that across the United States, China, and Taiwan, only 11 percent of production sites are adequately prepared for climate change disruptions. This statistic is even more shocking when you consider that an estimated 42 percent of organizations have already experienced supply chain disruptions due to extreme weather events.
Why aren’t more organizations working to protect themselves against this threat? What can manufacturers and retailers who depend on their supply chains as the lifeblood of their businesses do to safeguard their supply chains against escalating climate risk?
Global Climate Events Disrupt Supply Chains
The impact of climate disasters on supply chain performance is significant. Transportation arteries crumble as roads are washed away by floods, bridges toppled by storms, and power lines snapped by fierce winds. Extreme heat and cold cause equipment failure. Supply chain transportation comes to a halt, leaving goods stranded while production and manufacturing grind to a halt.
Eighteen percent of all sites in the U.S. and 48 percent of all sites in China and Taiwan have either no business continuity plan or no alternative sites lined up that could be put into operation quickly. As events become more frequent and widespread, the potential downtime and cost to businesses increases as well. The U.S. disaster toll in the last five years tops $595.5 billion, and natural disasters cost China $10 billion in July-August 2023 losses. Hurricane Ian's wrath resonated throughout Florida, resulting in $100 billion in total losses and devastating 2,800 manufacturing facilities to 7,000 producers of pharmaceuticals, medical devices, and diagnostic devices. The winter storm Uri's icy grip shattered Texas with over $10 billion in total damages and crippled Samsung's Austin plant, causing $268 million in product loss. While wildfire damages to structures and lands result in large direct losses, supply chain disruption during and following a wildfire event also accounts for a significant portion of such economic losses: $88.6 billion (about 60 percent of the total economic losses) was attributed to supply chain disruption during the 2018 California wildfire season. These examples have proven the importance of taking extreme weather events into consideration to ensure the health and stability of the supply chain to maintain competitiveness.
Protecting Your Supply Chain from Climate-related Disasters Poses Challenges
The reason many organizations aren’t protecting their supply chains more effectively is that they don’t have the visibility, the data, or the analytics to assess their climate-related risk accurately, much less to begin managing it.
Lack of Visibility
McKinsey found that 45 percent of organizations had either no visibility into their upstream or that they could only see as far as their first-tier suppliers. This visibility may improve if organizations can sustain the pace of digital transformation of their operations, but visibility alone is not enough.
Limited Data
Most providers lack critical data to provide a holistic picture of climate risk. For example, risk is often correlated to a location on a map — not to a specific business with financial and physical traits. The actual likelihood of recovery from a disaster can’t be predicted accurately. Subsidiaries’ risk from hazards like wildfires, storms, and flooding is not considered when the risk data models for the corporate parent you do business with do not incorporate it.
Complex and Multifaceted Risk Analytics
It’s difficult to run a risk analysis on supplier portfolios using multiple industry-standard (RCP/SSP) climate scenarios and time horizons to accurately inform strategic planning on diversifying our risk and report the projected financial impact in the Physical Climate Risk section of our TCFD-aligned report.
To adequately safeguard your supply chain, you’ll need to take the following steps:
1. Bring Physical Climate Risk into the Supplier Evaluation and Selection Process
Supplier evaluations usually encompass some type of risk assessment process. However, the potential risk of the supplier slowing down or failing to deliver due to a climate-related disaster is often overlooked despite noted increases in climate-related hazards. These events can damage infrastructure and reduce your supply chain’s resiliency. It’s vital that, as you evaluate suppliers and business partners, you take climate-related risk into account.
Corporate linkage, an entity’s position in its family tree, is an integral part of the supplier evaluation and selection process when bringing physical climate risk into consideration. By knowing the corporate linkage of your suppliers, you can know how severely an entity’s physical climate risks may affect your business operations.
2. Evaluate Your Existing Portfolio of Suppliers for Climate Risk
How well do you know your supply chain? Evaluating your current suppliers will help you better assess, manage, and mitigate negative impacts on your supply chain’s resilience. Use climate insights to evaluate and monitor your key suppliers' resilience to climate-related disruptions, such as extreme weather events, by analyzing their location, business operations, and dependencies. You can make informed decisions about future partnerships by analyzing your suppliers through the lens of climate risk. With this additional knowledge, some organizations may elect to boost inventory as a buffer against shocks, or they may choose to alter the layout of their network to address known vulnerabilities, but global supply chain changes are still in their nascent stages.
3. Inventory Optimization Is a Priority
By strategically managing inventory levels, improving forecasting and data-driven decision-making, and prioritizing sustainable practices, organizations can significantly reduce their vulnerability to climate-related disruptions. Fifty-eight percent of 113 supply chain leaders worldwide reported that they are prioritizing inventory optimization. Optimizing inventory levels allows you to diversify your supplier base, making your supply chain less vulnerable to disruptions caused by extreme weather events at any one location. Maintaining a strategic safety stock of critical items can help bridge the gap if climate-related disruptions temporarily halt production or transportation. Accurate demand forecasting becomes even more crucial in the face of climate fluctuations. Optimizing inventory based on these forecasts helps to anticipate and prepare for potential surges or dips in demand caused by disasters.
4. Maintain a Pulse on Shifts in Climate-Related Risks Throughout Your Supplier Relationships
To prevent ignorance of shifting physical climate-related risks, be aware of the shifts in climate events and the pivots your organization will have to make to avoid operational slowdowns and disruptions. It’s important to have frequently updated and accurate data. This allows you to understand the short-term implications of disruptions.
As mentioned earlier, physical climate risks will increase in intensity and frequency. Physical assets may be impaired and damaged. These events may drastically alter the supply and demand of specific commodities, transforming supply chains accordingly. Companies may be forced to rethink how they procure raw materials to stay ahead of the curve.
5. Ensure You Are Using Trusted Climate Risk Data and Sources to Back Up Your Decisions
Another way to ensure you’re prepared for potential supply chain disruption due to climate change is to use external referential data, including firmographic, operational, and financial and credit risk data, to fill in important details about current and prospective suppliers. This information helps determine your suppliers' probability of preparing for and recovering from potential climate disasters. For example, risk scores that combine frequently updated physical climate risk data gathered from geo-spatial satellites with financial and firmographic insights provide greater visibility into the probability of recovery from a climate-related disaster.
6. Monitor Evolving Climate Risks
While long-term planning sets the overarching vision and direction, short-term agility becomes vital in navigating the immediate impacts of climate events. However, short-term planning helps organizations keep up to date with shifts in physical climate-related risk. Access to physical climate risk data on a 30-day time horizon allows you to understand when to pivot to alternate suppliers to avoid operational slowdowns and disruption to production and distribution.
7. Be Aware of Emerging Regulations Impacting Your Business
As the impacts of climate change increase in severity and frequency, governments work to legislate responses to climate change. Businesses will need to be increasingly vigilant to ensure they and their suppliers remain compliant with voluntary and mandatory reporting worldwide. Failure to do so can result in steep penalties and fines, but keeping up with government regulations can be a daunting task.
Presently, various frameworks are used for climate risk reporting, and the most current disclosure mandates, including those in the UK, align with guidelines established by the Task Force on Climate-related Financial Disclosures (TCFD). In 2022, the U.S. Securities and Exchange Commission (SEC) proposed rule changes requiring companies to disclose certain climate-related information. The rule would require SEC-registered domestic or foreign companies to include climate-related information in registration statements and periodic reports, such as 10-K annual reports.
The Key to Building a Resilient Supply Chain
Building a resilient supply chain requires holistic visibility, climate data in both the short term and long term, and insights to make data-based decisions that mitigate the risk of operational slowdowns and disruption to production and distribution. The D&B Climate Exposure Indices provide an analytical score that incorporates both frequently updated physical climate risk data gathered from geo-spatial satellite imagery and Dun & Bradstreet’s financial and firmographic insights to provide visibility into an entity’s likelihood of recovering from climate-related hazards.
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