Supply Chains: Climate Change
2020 began with a widespread understanding across the business world that the impacts of climate change will be significant and far-reaching. Covid-19 has dominated headlines since its emergence, however, the threat of climate change remains and businesses need to address climate risk. The final installment in this series will focus on how climate change poses a real and immediate threat to global businesses and their supply chains.
In the World Economic Forum’s 2020 Global Risk Report, published before Covid-19, environmental factors dominated the global risk landscape in terms of likelihood and scale of impact. Climate change will increasingly threaten business operations as the effects become more common and intense in the coming years and decades.
Figure 1: The perception of global risk in 2020. Source: World Economic Forum Global Risk Perception Survey 2019-20
Where will be most affected?
Like Covid-19, climate change affects the entire global economy which means complex supply chains can leave companies exposed to its physical impacts right across the world. UK companies face the threat of stranded assets due to increased future flooding and more frequent productivity-sapping spells of heat, yet the impacts of climate change in many places around the world will be far more severe. The international nature of modern-day supply chains means that these impacts will reverberate far beyond their locality, likely reaching UK-based companies too.
“Indicative evidence suggests that the international threats and opportunities of climate change to the UK could be an ‘order of magnitude’ larger than domestic threats and opportunities for some thematic areas, in particular business (trade and investment) and food (supply chains).” International Threats and Opportunities of Climate Change for the UK, PWC
The floods which hit Thailand in 2011 were catastrophic and caused untold damage to the country and their population. Yet the event also showed how climate impacts at a local level can affect businesses around the world. It is estimated that 14,500 companies dependent on Thai suppliers experienced significant damage due to the floods. The damage to the global economy was reported to be $45 billion, with Western Digital losing 45% of its shipments, HP losing $2 billion, and NEC cutting 10,000 jobs due to a global shortage of hard disk drives which were produced in the region.
Figure 2: Flooding in Thailand. Source: Pixabay
The Thai floods provide a perfect example of how companies all around the world, including those based in the UK, will likely be affected by climate change events in the future. Yet the challenges of climate change are far more diverse and complex than ‘one off’ events. Secondary effects like mass migration and political conflict due to strained resource availability will cause a huge strain on society. These events will have an immense impact on supply chains within the embedded areas. Businesses need to work hard now to understand how their supply chains will be affected by the complex challenge that is climate change or face the list of impacts which accompany supply chain disruption.
How are businesses affected?
A report by BCI gives insight into what organisations perceive to be the biggest business impacts caused by supply chain disruption - the top five are shown in figure 2. They range from short-term issues such as a loss of productivity and revenue to those which may cause more long-term damage such as customer complaints and service outcome damage which can be detrimental to an organisation’s reputation.
Figure 3: The top 5 impacts and consequences arising from supply chain incident/disruption, measured by percentage of respondents. Source: BCI Supply Chain Resilience Report 2019
The extent to which UK businesses are currently exposed to such impacts varies hugely. Evidence suggests that smaller businesses are less likely to take action to make their supply chains more resilient, likely because of a lack of designated resources, while larger companies have the capability of being more prepared. Yet with the global risk landscape changing, all businesses need to better understand their supply change and the sooner the better for their long-term success.
The majority of businesses understand the risk of climate change at some level. Every business will have to adapt and evolve. Complex, international supply chains make this more difficult. Companies need to mitigate nationally and internationally against a consolidation of current and future climate change impacts. As we have seen in 2020, major disruptive events are hard to predict but those associated with climate change are less so, even if it’s difficult to predict their timing. Businesses must not sit on new found climate change awareness without making the preemptive changes needed to make themselves and their supply chains resilient to its future impacts. The time to change is now.
Co-authored by Governex and Harry Vigus
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