Global supply chains are in the crosshairs of climate-related threats.
Amid the political debates over climate change, its real costs are starting to mount. One study by the World Economic Forum has calculated the global cost of extreme weather events that occurred between 2000 and 2019 at a shocking $16 million per hour. More recently, in 2023, the United States sustained 28 confirmed weather/climate disaster events, each with losses in excess of $1 billion.
Global supply chains are squarely in the crosshairs of intensifying climate change threats. Imagine these scenarios: A heat wave cripples your supplier’s factory, leaving your shelves empty. Or a shipment of vital parts for your production line gets stuck in a port ravaged by a hurricane. Ports, the gateways of global trade, are especially vulnerable, with $100 billion lost annually due to extreme weather.
These are examples of the hidden blind spots in your supply chain, where climate change can create disruptive impacts that weren’t predicted and will present severe challenges for recovery and continuity.
What are the factors of physical climate risk?
The risks of climate change can be divided into two categories: physical and transition risks. The physical climate risks, those risks resulting from climatic events, can be either acute (driven by an event such as a flood, storm, or wildfire) or chronic (arising from longer-term shifts in climate patterns). Regardless of whether a physical climate risk is acute or chronic, it has a lasting impact and threat to your global supply chain.
In contrast, transition risks are those that arise as economies move from reliance on carbon-based energy toward net-zero carbon. Businesses and governments should adjust their day-to-day decisions in the face of a changing climate. Businesses need to reshape their production from carbon-intensive to carbon-free methods.
Strong and stable economic growth is tied to managing and mitigating both the physical and transition risks of climate change and avoiding catastrophic tipping points. The development of new methods for robust assessments and disclosures of climate-related risks will help achieve a carbon-neutral outcome.
How much damage has been caused by climate-related disasters?
Real-world damages of physical climate risks are not a myth or buzzword. Rising seas and extreme weather cripple ports, costing $7.5 billion annually. In 2021, Typhoon Hagibis, which hit Japan, Russia, and Alaska, caused $17 billion in losses. In 2023, natural disasters cost China $10 billion.
In the U.S., the disaster toll was $595.5 billion between 2018 and 2022. In 2021, Winter Storm Uri gripped the state of Texas, which sustained over $10 billion in insured losses. The event crippled Samsung’s Austin, Texas plant, causing $268 million in product losses. In 2022 alone, 18 separate weather and climate disasters pummeled the U.S., costing at least $1 billion each. That year Hurricane Ian’s wrath resonated throughout Florida with $100 billion in total losses. Nearly three thousand manufacturing facilities and 7,000 producers of pharmaceuticals, medical devices, and diagnostic devices were also devasted. These are just some of the damages that climate change has wrought.
How to assess physical climate risk along supply chains
In the face of escalating physical climate risk, uncovering the hidden connections between physical climate disasters and vulnerable supplier relationships is paramount. It helps identify potential disruptions before they occur, enabling procurement and sourcing teams to shift to a more vigilant strategy and choose only the best suppliers.
With the ultimate goal of mitigating supply chain interruptions, keeping ahead of shifting risk factors, and maintaining operational efficiency, these four strategies are tools to strengthen supply chains and turn vulnerabilities into resilience.
1. Incorporate physical climate risk into supplier assessments
The first step is to evaluate suppliers through a climate risk lens, considering their risk exposure to climate-related perils. Use data on acute and chronic physical climate risks like wildfires and floods to assess their vulnerability and ability to meet demand consistently. With this data, you have more visibility into past events, the likelihood of your suppliers encountering potential climate-related disasters, and a supplier’s chances of withstanding climate-related disasters that may strike. This extra layer of visibility into a supplier is critical in shoring up your supply chain against physical climate risk.
2. Understand risk severity and probability of recovery
Look for suppliers with a proven track record of operational continuity, and have alternate suppliers lined up in case of disruption. Will they be able to operate during and after a significant climate-related disaster? It’s vital to conduct adequate evaluations of suppliers’ resources and resilience to minimize the possibility of operational delays and slowdowns.
Corporate linkage, or the ability to understand an entity’s position in its family tree, is one factor that can help you understand how severely an entity’s physical climate risk levels may affect your business operations. For example, a key aspect of this due diligence is understanding the severity of the impact on a company’s headquarters versus a subsidiary of a company with hundreds of locations. These locations could be integral to providing inventory for the business, so understanding corporate linkage is essential.
3. Stay ahead of the curve
Mother Nature is an unpredictable force, so access to up-to-date climate data is essential when pivoting to alternate suppliers. Without accurate data, you lose the ability to stay agile. By continually evaluating your suppliers using physical climate risk insights, you use the most up-to-date data to make strategic decisions. This data should be provided with short-term time horizons — within 30 days is a good target — to enable you to react quickly to changes and help ensure uninterrupted production and distribution.
4. Proactively manage your supply chain's health
Stay ahead of climate-related disasters with regular climate risk assessments that help you navigate disruptions, build resilient partnerships, and achieve smooth, dependable supply chain performance. By proactively engaging in climate assessments, you empower your business to identify and mitigate hidden supplier risks, creating a future-ready supply chain that adapts to climate-related disasters.
Making the most of mandatory and voluntary reporting
The financial cost of climate change is becoming clearer as its impacts increase in severity and frequency. To build economic resilience, many governments are implementing mandatory climate risk reporting to push businesses to identify and act on their climate vulnerabilities. These reports are then used to inform long-term adaptation strategies.
For businesses, it’s vital to comply with and stay ahead of regulatory requirements to prevent legal consequences. And voluntary reporting creates a competitive advantage that plays out in two crucial ways. The first is making forward-thinking decisions that build business resilience — undoubtedly one of the most significant benefits of physical climate risk reporting. The second is identifying and seizing adaptation and purchase opportunities ahead of competitors.
D&B Climate Risk Insights combines physical climate risk data — along with globally leading firmographics and financial characteristics — to provide the visibility needed to mitigate climate-related risks throughout business relationships. The solution leverages D&B Climate Exposure Indexes — analytical scores that provide visibility into the likelihood of recovering from climate-related hazards — and corporate linkage insights. These, combined with expansive private company coverage, can help you to protect your supply chain from physical climate risks in the short- and long-term.
The information provided in articles are suggestions only and based on best practices. Dun & Bradstreet is not liable for the outcome or results of specific programs or tactics undertaken based on your use of the information. Please contact an attorney or financial/tax professional if you are in need of legal or financial/tax advice.