Why global businesses must consider climate change risks to their supply chains

A version of this post was shared in August 2024 on the Global Supply Chain Institute blog, where supply chain professionals can find essential reading from leading researchers and scholars on the latest trends and topics relevant to global supply chain management. You can read the original post here.

In August 2024, the University of Tennessee Global Supply Chain Institute published its latest white paper, “Climate Change Risk and Supply Chains,” by Sara Hsu. The paper summarizes research conducted by Hsu, Joshua S. Fu and Gonzalo A. Ferrada for the Advanced Supply Chain Collaborative. Download the white paper.

Globally, extreme weather events are on the rise, posing significant challenges to supply chain managers. Executives have been left scrambling to address recent natural disasters, such as Hurricane Ian and the Texas ice storm, that have caused major disruptions to operations and logistics. Some of these events have upended supply chains by damaging industrial installations, as in the case of Hurricane Ida. They’ve wiped out commodities in flood-damaged areas, as in central China. And they’ve shut down transportation routes, as in British Columbia’s wildfires in 2021.

In the face of hurricanes, droughts, and heat waves, managers must make rapid decisions and pivot to alternative suppliers or different logistic routes. At the same time, they must reckon with climate-related regulations that require firms to adjust operations. Initiatives such as mandatory climate risk disclosures are evidence of greater demand for transparency and risk assessment within companies. Governments in the United States and Europe are focused on reducing greenhouse gas emissions; the Biden administration aims to halve greenhouse gas emissions by 2030, while the European Green Deal seeks climate neutrality by 2050. These regulations will reshape industries toward more sustainable practices.

To face these challenges, supply chain managers must ensure resilience in their supply chains and implement future-proof strategies. This requires leaders to invest in innovative solutions that mitigate climate change risks while protecting profitability and growth. Processes such as mapping supply chains and assessing risks are essential. In contrast, activities that mitigate supply chain risk, such as setting up alternative production sites or establishing secondary suppliers, must receive greater consideration.

Earlier this year, my research team with the University of Tennessee Global Supply Chain Institute created a Climate Change Index and risk report to aid industry professionals in this process. This paper summarizing our research provides a general assessment of country-level risk exposure. The aim is to help those companies considering location decisions about where to place operational assets or from which countries to source, as well as whether redundancies or backup suppliers must be developed.

According to standard methods, climate change risks are categorized into two primary types: transition and physical risks. Transition risks encompass policy, legal, technological, market, and reputation-related risks. Physical risks entail acute (extreme weather events) and chronic (long-term climatic changes) categories. Acute risks, such as hurricanes and wildfires, can damage infrastructure, disrupt supply chains, and result in financial losses. Chronic risks encompass rising temperatures and sea levels, significantly influencing sectors like agriculture and manufacturing. Physical and transition risks create feedback loops into one another, resulting in unpredictability across supply chains.

Our Climate Change Index uses this categorization of physical and transition risks. Among the indicators for physical risks were climate-related disaster frequency, freshwater withdrawal, and population exposure to particulate matter. We included non-life insurance coverage, environmental technology patents, and production-based CO2 productivity for transition risks. These indicators were selected to represent key aspects of climate change exposure and data availability.

The Climate Change Index can be used at a high level to make strategic supply chain location decisions. Firms also benefit from implementing risk mitigation measures to reduce the impact of future climate risks and regulations on their supply chains. Some firms may obtain a positive return on investment by increasing productivity or creating climate-friendly products that customers prefer. This allows forward-thinking companies to not only survive climate change risks but also to benefit from the current challenge. will discuss critical background and organizational support for senior planning leaders.

To learn more about how your company can partner with the University of Tennessee Global Supply Chain Institute to explore advanced concepts in supply chain management, visit ASCC.

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