Climate Change’s Impact on Global Supply Chains

Supply chains today are already feeling the effects of climate change, with climate-driven wildfires cutting off major transit routes in California and unprecedented hurricanes destroying ports and factories around the world. Already, climate change is increasing the severity and frequency of natural disasters like flooding, droughts, deadly heat waves, hurricanes, and fires.

Unfortunately, this is not the worst of it; climate change will continue to worsen in decades to come, presenting an extreme risk to individuals and businesses alike. Climate-driven supply chain disruptions are sure to become one of the biggest threats that supply chains face in years to come, and climate change will undoubtedly stress global economies. In fact, it’s estimated that under current policy, climate change will reduce the United States’ GDP by 10% by 2100, and the GDP of vulnerable countries by an average of 64%.

This article will review how climate change impacts supply chains, and how companies can respond to mitigate climate change’s effects on their bottom line.

There are four primary impacts that climate change will have on supply chains. While these are not the only ways climate change will impact supply chains, they are some of the major challenge areas companies should consider when planning for climate change. These include transportation problems, sourcing difficulties, a reduced workforce, and infrastructure damage.

Transportation Problems

As climate change increases the frequency of extreme weather events like storms, delays will become more common as shipping vehicles must wait for the weather to improve. Additionally, transportation infrastructure may be damaged by climate change. For example, rising sea levels, predicted to rise by up to 6 feet by 2100, may cause flooding over roadways, and highways and ports may be damaged in hurricanes. This will make transporting goods dangerous in some situations, and potentially impossible for weeks to months after a storm event.

We’re already seeing climate change impact transportation today. Hurricane Sandy in 2012 left the Red Hook Container Terminal of the New York Port unable to receive shipments for eight days. Extreme rainfall left the Rhine River closed to river shipping in February 2021, only to be closed again in April due to drought water levels that were too low for boats. These kinds of climate events have the potential to severely disrupt supply chains around the world, especially as they continue to become more frequent and more intense.

Sourcing Difficulties

Climate change threatens natural resources that are crucial to many of the products and services supply chains provide. For example, drought can lower the availability of important foods, greatly impacting the global food supply. The price of many agricultural products have already risen as a result of drought, including pork, oats, sugar, coffee, wheat and corn. In 2021, futures prices for oats rose by 80%, coffee rose by 59%, and soybean futures reached their highest level since 2012. Drought also makes any production processes that rely on water more difficult and expensive.

Climate change also reduces biodiversity, which in turn reduces the availability of many raw materials we rely on to make consumer products and other goods. For example, 25% of medicines are produced using substances from rainforest plants; a loss of biodiversity, which is already threatening the rainforest, will have consequences on supply chain sourcing around the world.

While all industries will be impacted differently depending on the resources they rely on, all will likely face shortages or increased costs.

Reduced Workforce & Unsafe Working Conditions

Climate migration, the displacement and migration of people due to changes in their environment caused by climate change, is increasing. By the end of 2021, nearly 6 million people in 84 countries were living in displacement due to climate disasters. Climate migration will continue to disrupt labor availability, especially as many climate refugees are from developing countries where much of the world’s manufacturing is located.

Climate refugees are also often in desperate situations, which can lead to an inability to avoid unsafe working conditions. For example, the Rana Plaza garment factory was largely staffed by climate migrants who came to Bangladesh after losing their ability to make a living farming due to extreme weather and rising sea levels. While other shops in the building evacuated, such as a bank, many workers in the garment factory returned in order to try to protect their day’s wages, only to be inside when the building collapsed, killing over 1000 workers. Climate change has the potential to lead to further reductions in ethical working conditions, from safe working temperatures to buildings’ structural integrity.

Increased climate-disruptions at workplaces, such as disease, storms, or even high temperatures will likely also cause delays and lowered productivity, not to mention unsafe working conditions.

Infrastructure Damage

The final key impact of climate change on supply chains is damage to infrastructure, including warehouses, factories and, as discussed above, transportation infrastructure. Increasing storms, fires, sea level rise, and other climate impacts are sure to cause damage. Damage may not always be caused by extreme catastrophic events, but can be gradual as well. For example, some experts blame the recent collapse of the Champlain Towers condominium in Miami on rising sea levels. Ensuring the structural integrity of your buildings and other infrastructure will be crucial to ensuring operations can continue to run smoothly in the face of increased environmental pressures and disasters.

 Why Are Modern Supply Chains Vulnerable to Climate Change?

Today’s complex supply chains are vulnerable to climate change for two interrelated reasons: their global spread and a lack of visibility. Around 70% of international trade today relies on a global supply chain. This reliance on production or sourcing in other countries increases the chances of disrupted transit due to natural disasters.

Many supply chains based in developed nations may also have suppliers in countries that are more vulnerable to climate change’s impacts. For example, the vast majority of semiconductors are made in Taiwan, a country prone to tropical storms. When Typhoon Chanthu swept through the country in 2021, chip production and delivery was severely delayed, causing disruptions to major electronics and automobiles companies’ supply chains.

Reduced supply chain visibility resulting from complex global supply chains also increases a company’s vulnerability to climate change, as managers are less likely to be aware of potential risks, such as storms or flooding, and thus less likely to be able to react quickly. Companies that take proactive steps to increase visibility will strengthen the resiliency of their supply chain in the face of climate change.

Climate preparedness may not be on the forefront of supply chain managers’ minds today, as the worst impacts are yet to come. However, to mitigate these impacts of climate change on supply chains, companies will greatly benefit from preparing now, rather than reacting in the future.

How Leading Companies Are Mitigating Climate Risks in Their Supply Chains

According to a recent McKinsey study, an electronics company that is prepared for climate emergencies may only lose 5% of their revenue as a result of a 100-year hurricane, while one that is unprepared may lose 35%. Clearly, climate preparation is a crucial aspect of protecting your bottom line.

Companies in every sector are taking the lead in preparing their supply chains for climate change. While each company’s plan differs, most include three major actions that work to lower the risks that climate change poses to their supply chain, including: planning for emergencies, increasing visibility, and mitigating climate change. Here are a few examples of how leading companies are securing their supply chains against climate change.

Colgate-Palmolive: Climate Risk Planning

Leading personal-care product manufacturer Colgate-Palmolve is planning for climate change in order to reduce risk and also to take advantage of competitive opportunities climate change creates. In 2016, MIT researchers advised Colgate-Palmolive to increase their risk mitigation plans from five years to twenty years in order to prepare for climate change. The company’s 2021 Task Force of Climate-Related Disclosures Report does just that, laying out potential risks and how they plan to respond.

Colgate’s risk management system includes identifying risks across the entire organization, and then assigned to a member of the company’s Enterprise Risk Management (ERM) Committee, who then works with the company’s supply chain and sustainability managers to evaluate how to best manage this risk. Their risk planning also includes evaluating several potential climate scenarios and planning appropriately.

Colgate-Palmolive’s strategy highlights the importance of planning for a broad variety of types of risk. Companies that have long-term emergency plans as well as disaster-preparedness plans will be more prepared to respond quickly to climate events and avoid disruptions. As MIT notes, successful planning includes strategies for fast, short-term reactions to discrete events, such as storms, in addition to longer-term plans that take into account gradual changes over time (for example, how you will be affected by rising sea levels).

Starbucks: Strengthening of Supplier Relationships

An Oxfam study of how climate change is impacting Starbucks and other leading companies found that one of the main actions companies can take to address climate change’s effects is to increase visibility into your suppliers’ practices and build stable, long-term relationships with suppliers.

Starbucks sources around two-thirds of its coffee from small-scale suppliers in Africa, Latin America and Indonesia. As climate change caused excessive rainfall and increased landslides, Starbucks began evaluating its suppliers more closely and investing in their ability to avoid and respond to landslides or other climate events. Through continued communication with suppliers and frequent supplier inspections, Starbucks was able to discourage the removal of trees that lead to landslides, and encourage practices that increase soil health. This long-term collaboration reduced the vulnerabilities of small-scale suppliers, and thus increased the climate-resilience of Starbucks’ supply chain overall. Increasing supplier monitoring and strengthening relationships with suppliers will be a crucial aspect of mitigating climate risks in supply chains in every industry.

Gucci: Mitigating Climate Change

The best way companies can prepare for climate change is to mitigate its effects. Many companies’ supply chains account for over 90% of their greenhouse gas emissions. Reducing Scope 3 emissions, or the emissions resulting from activities upstream and downstream of the company, is the most impactful way to lower carbon footprints.

Luxury fashion-brand Gucci mitigates climate change by offsetting their carbon emissions through projects that remove carbon from the atmosphere. Gucci goes above and beyond many other companies’ climate efforts, as not only do they avoid and offset greenhouse gas emissions from their own operations, but they also work to reduce or offset emissions from their entire supply chain, a task that requires superior supply chain visibility. Considering that many companies’ supply chains account for over 90% of their greenhouse gas emissions, reducing Scope 3 emissions, the emissions resulting from activities upstream and downstream of the company, is the most impactful way to lower carbon footprints.

Gucci is not alone in their efforts to reduce their impacts on the climate; major companies in nearly every industry are making shifts to reduce their contributions to climate change. For example, in 2020, Microsoft pledged to remove all the carbon emissions it has ever produced by 2050, while six major automobile manufacturers committed to phasing out vehicles that rely on fossil fuels by 2040. Marks & Spencer, a major food and clothing retailer in the UK, carried out a climate change risk assessment in 2011 and has since moved towards sourcing sustainable cotton. The company’s climate change manager noted that when it comes to climate risk, “It is not obvious what changes are needed. Instead, you need to build the capacity to change, both within the company and its suppliers.”

Climate Preparedness: A Competitive Advantage

Most companies do not have adequate plans for climate change’s effects. In fact, a recent study of 100 technology, automobile and consumer goods manufacturers in the US, China and Taiwan found that only 11% of suppliers were fully prepared for climate disruptions with backup suppliers, disaster-response plans, and business continuity plans. By preparing for climate change and its impacts now, companies stand to significantly outcompete their unprepared counterparts when disaster does, inevitably, strike.

Author Bio; Lena Milton is a freelance writer covering sustainability, supply chains and environmental science. She writes to help consumers understand the environmental and ethical challenges in everyday life so we can find viable solutions for both