In what is being termed the "world's worst traffic jam," about 200 cargo ships await passage through the Panama Canal – a vital artery for international trade. This situation is attributed to the worsening climate change crisis as the region grapples with severe drought. The duration of waiting times for vessels transiting the Panama Canal has steadily risen, now extending up to 21 days as of August 8, 2023, a notable increase from the 18-day wait observed earlier in August. Ricaurte Vásquez Morales, the canal administrator, stated in a recent press conference that the restrictions could continue throughout the remainder of 2023 due to the worsening drought, leading to a staggering revenue loss estimated at $200 million.
This is one of the many evidences of how climate change has been impacting global supply chains. A substantial part of the global economy operates through a complex system of interconnected supply chains. These supply chains are crucial for facilitating worldwide trade in various goods and commodities, collectively holding a staggering annual value of nearly $20 trillion! The worsening climate change disturbs this intricate balance by affecting resource availability, transportation, production, costs and market dynamics.
This is evident by looking at how extreme climate events have disrupted the supply chain in the recent past. For example, a record-setting drought in China last year led to a significant drop in hydropower production in the region as the Yangtze River dried up. Factories had to thus divert electricity toward residential use, which slowed down the transportation of essential components needed for the production of automobiles, batteries and solar panels. This had a ripple effect on global businesses.
Similarly, severe flooding in Thailand in 2011 led to the shutting down of factories, leading to significant damage in the worldwide automotive and electronics manufacturing sectors, costing over $30 billion. The Thai Central Bank assessed that the supply chain disruptions were responsible for a staggering 76% reduction in the anticipated GDP growth rate, causing it to plummet from the projected 4.1% to a mere 1% in actuality.
Climate change has thus emerged not only as an environmental crisis but as a formidable disruptor of commerce itself.
Why do organisations need to consider climate-related risks in their supply chains?
In this era of unprecedented environmental challenges, companies are compelled to reassess their operational paradigms and undertake proactive measures to safeguard their supply chains against the formidable risks posed by climate disruptions. From financial costs to industry upheavals and even socio-economic implications, the imperative to consider climate risks within supply chains has become increasingly apparent.
Organizations must factor in climate risks to their supply chains due to the worsening climate crisis, which is amplifying the associated risks. According to a recent United Nations report, between 2000 and 2019, the world experienced 7,348 significant natural disasters, leading to the loss of 1.23 million lives and causing a total of $2.97 trillion in economic losses worldwide. A discernible pattern reveals a surge in occurrences of natural calamities like droughts, hurricanes, and wildfires, spanning a wider geographic spread. These catastrophic events are inclined to sporadically devastate global supply chains, compounding issues such as scarcity, delayed shipments, and higher prices.
According to Gartner, the impact of climate change on supply chains is anticipated to lead to threefold more disruptions due to labour shortages by 2026, in contrast to the current scenario.
These disruptions have huge costs associated with them.
CDP predicts that companies could incur up to $120 billion in supply chain environmental risk costs from 2021 to 2026.
Likewise, Christoph Schiller, a finance professor at Arizona State University, in a 2021 paper he co-authored, states that instances of climate shocks exceeding expectations could lead to customer attrition rates of up to 11% for suppliers. The pervasive influence of climate change extends beyond primary disruptions but also causes indirect disruptions, causing additional consequences such as migrating workforce or infrastructure requiring modifications and upgrades to adapt to new environmental challenges. The United Nations Development Program's forecast of over $2 trillion in productivity losses by 2030 due to workplace disruptions induced by climate change paints a somber picture of the toll it can take on global economies.
Furthermore, no sector is completely safe from the impacts of climate change.
“Whether you’re in the agricultural sector or the forestry sector, or in the tech sector, there is really no particular sector that is immune from climate change,” says Christy Slay, Senior Director of Science and Research Applications at The Sustainability Consortium.
While an organization might possess only a few assets directly, its operations often hinge on extensive supply chains interconnected with numerous assets, encompassing factories, power plants, and office structures. Consequently, all entities within this intricate supply network collectively bear the vulnerabilities associated with potential harm to these assets.
Many governments and regulatory bodies are also increasingly focusing on climate-related regulations and reporting requirements.
For instance, ESG regulations have witnessed 155% increase in the last decade!
Organizations that do not address climate risks in their supply chains may face regulatory challenges such as non-compliance penalties and legal sanctions. Emerging environmental regulations are also poised to reshape the operational landscape of many companies. For example, new rules issued by the International Maritime Organization (IMO), the United Nations' governing body for global shipping regulations, carry substantial repercussions. These regulations are anticipated to profoundly impact the service configuration of container lines and could reverberate through production location decisions that form the foundational structure of worldwide supply chains.
In addition, investors, shareholders, customers, and other stakeholders are also placing growing importance on ESG factors. Organizations that do not address supply chain climate risks may face pressure from investors and other stakeholders, potentially impacting their access to capital and market valuation.
How can Climate Intelligence help?
Amidst this backdrop of increasing climate volatility, the concept of Climate Intelligence (CI) has emerged as a pivotal tool to fortify supply chain resilience. By assimilating climate data, predictive analytics, and risk assessments, companies can navigate the complex interplay between climate change and supply chain dynamics, enabling them to anticipate disruptions and implement proactive strategies. Satellite data and AI especially can enhance Climate Intelligence by providing real-time environmental monitoring and predictive modeling, allowing companies to make informed decisions to safeguard their supply chains from climate-related disruptions.
Some of the notable benefits of climate intelligence in this regard are:
1. Risk Assessment and Management
Climate intelligence involves the meticulous monitoring and analysis of climate-related risks, encompassing extreme weather events like hurricanes, floods, and droughts, as well as longer-term shifts such as sea level rise and temperature changes, helping organizations achieve a comprehensive understanding of potential vulnerabilities along their supply chains. Geospatial analytics powered by Artificial Intelligence and data visualization tools enable businesses to obtain specific visual representations, facilitating insights into potential risk hotspots. This allows for informed real-time decision-making and enables the formulating of appropriate business continuity plans to safeguard operations.
2. Strategic Decision-Making
Climate intelligence offers a basis for strategic decision-making, enabling companies to develop tailored strategies to manage and mitigate climate-related risks. These strategies encompass diversifying sourcing locations, identifying alternative transportation routes, and investing in more resilient infrastructure. It provides timely insights to adopt strategies such as bridging and buffering, helping reinforce supply chain resilience. It also enables swift responses to emerging threats, minimizing the disruptive effects of climate-related events. Additionally, the ability to establish contingency plans and collaborate with supply chain partners enhances overall resilience across the ecosystem.
3. Decarbonise Operations
As the impact of climate change on businesses get increasingly severe, the imperative for companies to decarbonize their operations has never been more pressing. John Sterman, professor of management at MIT's Sloan School of Management, contends that a proactive approach to curbing carbon emissions offers companies the most effective shield for both themselves and their supply chains. He asserts that companies should focus on emission reduction strategies that simultaneously enhance resilience and yield additional benefits. This dual-purpose approach not only reduces exposure to risks but also fortifies the company.
As an illustrative case, Sterman cites Credit Human, whose recently completed energy-efficient headquarters in San Antonio, featuring a sizable solar array on the roof and ground-source heat pumps, remained operational during the Texas deep freeze in February, while others around it were not.
Further, decarbonization enhances a company's resilience against regulatory shifts, stakeholder expectations, and evolving market dynamics. Moreover, it fosters innovation, drives cost efficiencies, and strengthens brand reputation, positioning businesses as leaders in a rapidly changing landscape. By decarbonizing, companies contribute to a more sustainable future while safeguarding their own longevity and competitiveness.
The transformative potential of CI extends even further, helping companies reduce their carbon footprint. This facet assumes paramount importance because not only are supply chains vulnerable to climate change, but they are also responsible for it. Interestingly, a mere eight supply chains hold the reins to more than 50% of the global carbon dioxide emissions. This revelation underscores the profound influence these supply chains wield in shaping our planet's fate. Recent studies on carbon insetting suggest that attaining a "net zero" carbon footprint demands a cohesive and collective effort involving all participants within a supply chain. Thus, The key lies in fostering extensive collaboration across supply chains, a pivotal movement already championed by pioneering corporations.
Pioneering Transformation: Reshaping Supply Chains for Ecological Harmony and Economic Vitality
Despite the recurring disruption caused by climate disasters, an opportunity exists for transformation. Leveraging the potential of satellite data and AI, companies can reclaim command over operations and optimize them, minimize costs, and be better prepared for impending disruptions. By harnessing the synergies of technology, collaboration, and a shared commitment to a greener future, companies can revolutionize supply chains to be more resilient, responsible, and responsive.
As companies confront this shared challenge, the resilience of supply chains holds the power to shape more than just the movement of goods. It stands as a determinant of economic stability, community well-being, and the collective aspiration for a sustainable tomorrow.