Surging Perils Unveiled: Unseen Consequences of Climate Perils on Corporations' Value Networks
In a world where climate change continues to shape our environment, its impact on global supply chains is becoming increasingly significant, particularly for sectors exposed to physical climate risks. According to a recent study by S&P Global, the five sectors most directly exposed to nine physical climate risks are agribusiness, forest and paper products, consumer (food), chemicals, and building materials [1].
S&P's research focuses on potential risks to sectors downstream of climate hazard events and their potential impact on credit. The study analysed 29 sectors in total, all of which inherit some physical climate risk from their value chains [1]. By 2030, all 29 sectors are expected to have a moderate direct exposure to climate hazards [2].
The research highlights several key impacts that businesses should be aware of:
1. Transportation and infrastructure disruptions: Critical supply chain infrastructures, such as ports, railways, and highways, are increasingly vulnerable to flooding, storm surges, hurricanes, and extreme weather events. For instance, Hurricane Ida in 2021 caused widespread logistical delays across multiple industries in the U.S., emphasising the sensitivity of transportation networks to climate shocks [1].
2. Disrupted sourcing and production: Climate change alters agricultural yields and crop viability due to unpredictable weather and rising temperatures. Sectors like agriculture, coffee, and wine production are directly affected as some regions become unsuitable for traditional crops, jeopardising supply continuity and quality [1][2].
3. Labor force instability: Workers face rising risks from heatwaves and natural disasters, which threaten their health and productivity. This is especially acute in regions with weaker health infrastructure, affecting sectors dependent on manual labour in vulnerable geographies [1][5].
4. Upstream supplier fragility: Supply chains often extend globally; climate events impacting remote suppliers can cause shortages or shutdowns downstream. Companies lacking transparency into their extended supplier networks are at greater risk of unexpected disruptions [1].
5. Inventory and demand uncertainty: Climate change can shift consumer demand unpredictably—for example, extreme winters may spike heating product demand, while floods reduce inventory availability, complicating supply planning [1].
Looking ahead, companies are advised to consider climate change a current and ongoing supply chain threat requiring strategic planning. They should increase supply chain visibility, especially upstream supplier networks, and build climate-resilient, adaptable supply chain models that account for physical risks and demand shifts. Companies must also engage with social and environmental governance frameworks to manage associated risks responsibly [1][3][4].
Moreover, companies with robust adaptation plans that consider value chains exposures are more likely to be better placed to navigate the threats of worsening climate hazards. Some sectors with complex and long value chains may have significant indirect exposure to climate hazards, even if they have low direct exposure scores [3].
Lastly, companies must proactively monitor adaptation and resilience plans for potential disruptions to effectively and quickly respond to manage the potential devastating impacts of climate shocks. If adaptation plans are not set in place, all sectors will see a rise of more than 8% in value-chain exposures to climate hazards by the 2050s [2].
In summary, climate change poses a critical challenge to global supply chains with heightened risks for agriculture, transportation, and labor-dependent sectors due to increasingly frequent and severe physical climate impacts. Addressing these risks demands integrated, forward-looking supply chain strategies emphasising resilience, transparency, and sustainability.
References: [1] S&P Global. (2021). Physical climate risks and credit: An analysis of sector vulnerabilities. Retrieved from https://www.spglobal.com/esg/research/articles/physical-climate-risks-and-credit-an-analysis-of-sector-vulnerabilities-74089668 [2] S&P Global. (2021). Physical climate risks and credit: An analysis of sector vulnerabilities - Executive Summary. Retrieved from https://www.spglobal.com/esg/research/articles/physical-climate-risks-and-credit-an-analysis-of-sector-vulnerabilities-executive-summary-74089669 [3] CDP. (2020). Climate change: A global risk to the supply chain. Retrieved from https://www.cdp.net/en/research/reports/climate-change-a-global-risk-to-the-supply-chain [4] UN Global Compact. (2021). Business Ambition for 1.5°C: A roadmap for setting science-based targets in line with a 1.5°C future. Retrieved from https://www.unglobalcompact.org/take-action/business-ambition-for-1-5c/science-based-targets [5] International Labour Organization. (2019). The ILO Action for Climate and Environment: A Framework for Action. Retrieved from https://www.ilo.org/global/topics/climate-change/publications/WCMS_734723/lang--en/index.htm
- In the face of escalating climate change, industries must pay heed to the potential risks to their supply chains, as underscored by S&P Global's study, which indicates that all sectors will experience a moderate direct exposure to climate hazards by 2030.
- One of the key hazards affecting global supply chains is disrupted sourcing and production, a consequence of climate change-induced unpredictable weather and rising temperatures, particularly in sectors like agriculture, coffee, and wine production.
- In addition, companies should be aware of the vulnerability of critical supply chain infrastructures, such as ports, railways, and highways, to flooding, storm surges, hurricanes, and extreme weather events, as illustrated by the widespread logistical delays caused by Hurricane Ida in 2021.
- To mitigate these risks, businesses are advised to engage with social and environmental governance frameworks, increase supply chain visibility, especially upstream supplier networks, and build climate-resilient, adaptable supply chain models that account for physical risks and demand shifts.
