By Randal Waters ,
Senior Vice President, Emerging Risks Group, Marsh Advisory
09/20/2023 · 4 minute read
Global supply chains are subject to a diverse range of threats – and climate change is increasingly prominent among them.
Sectors that are especially vulnerable to climate-related supply chain disruption feature within many of the themes of New York Climate Week, such as transport, energy, manufacturing, and food.
Climate risks can interrupt supply chains in a number of ways. First, extreme weather has potential to cause damage to owned assets and suppliers throughout the supply chain. It can also damage the infrastructure that connects them, such as power plants, ports, railways or waterways.
Additionally, extreme weather events do not need to cause damage to lead to a business interruption. For example, wildfires in Canada in 2021 caused a four-day backlog at the port of Vancouver, while power blackouts caused by Storm Uri in Texas shut down production in sectors from pharmaceuticals to semiconductors. Low water levels due to drought have recently interrupted waterborne freight from the Mississippi to the Yangtze and the Panama Canal.
The second type of impact is supply shortages caused by extreme weather. These particularly affect agricultural supply chains: In addition to the devastating loss of life and livelihoods, floods in Pakistan in 2022 destroyed crops intended for both domestic consumption and export, including cotton and wheat. According to Marsh’s analysis, flood disasters are almost three times as common now as in the 1980s.
Third is the impact that extreme weather has on people. The affect that increases in extreme heat weather conditions has had on workforces is an example of this. According to one estimate, by 2030 extreme heat could lead to 5% of working hours being lost in some regions.
How can companies respond? As discussed in Marsh’s recent report, there are five main steps that can be taken.
Data from the American Productivity and Quality Centre suggest that roughly four in five businesses lack an overview of their supply chain beyond first-tier suppliers. Information on second- and third-tier suppliers can be hard to gather and traditionally involves surveying first-tier suppliers, who may not want to volunteer that information.
AI solutions can increasingly overcome this problem by analyzing open-source data from sources such as shipping and customs, and speedily achieving a similar quality of insight as surveys.
Mapping is only the first step in identifying vulnerabilities. The next is identifying when supplies could be severely impeded by climate-related disasters, and what factors could limit alternative options. For example, a company that markets juice as “made with Florida oranges” needs to ask: “what if a climate-related weather disaster affects the orange crop in Florida?”
Weighing up multiple diverse sources of risk is hard: How should climate-related threats to supply chains be balanced alongside other risks, such as natural disasters or cyberattacks?
Converting diverse risks into a standardized score can help, but more advanced risk modeling techniques are needed to stress test the impacts of different scenarios in terms of damages, downtime, and revenue loss.
COVID-19 lockdowns demonstrated how dependent global supply chains were on multiple suppliers all clustered into a regional hub. It may be possible for companies to work with local authorities in such regions to strengthen resilience against future climate-related disasters. Otherwise, companies can look to build their resilience by developing contingency plans and putting in place early warning systems.
When risk cannot practically be reduced, there may be options to transfer it. It is important to note that business interruption insurance has historically not covered supply chain interruptions, especially beyond the first tier. However, when companies understand the risks to which they are exposed, they can often work with insurers to develop specific products for those risks.
Imaginative approaches could be increasingly critical to riding out the disruptions to supply chains that will become more common as climate change takes hold.