I understand that predicting companies must adapt to climate change or die is a bit hyperbolic. I do believe, however, that companies failing to adapt will lose out to their competition. Experts are warning that things are going to get bad. “The verdict is out,” writes journalist Elise Leise. “According to McKinsey & Co, as climate change worsens, the world will face more frequent and severe extreme weather events — hurricanes, tsunamis, and floods. Inevitably, these will interrupt production, increase sourcing costs, and cut into corporate revenue.”[1] Journalist Matthew Rozsa argues that extreme weather events are the new normal and companies need to adjust to this reality. He writes, “If you thought COVID-19 caused problems for supply chains, imagine how they’ll be blown apart when climate change causes extreme weather events, rising sea levels and massive spikes in temperature all over the world. There will be increasingly frequent and severe wildfires on the Pacific Coast, flooding in our eastern cities and millions of refugees. It is impossible to anticipate the number of new variables this will throw into orderly supply chain management — other than accepting that particularly intricate supply chains are almost certainly going to start coming apart.”[2]
No Company Will Avoid the Consequences of Climate Change
Today’s supply chains are so interconnected and so widespread that extreme weather in one part of the world inevitably results in far-flung repercussions. Journalists Ana Swanson and Keith Bradsher report, “Interruptions could soon become more frequent for companies that source parts and products from around the world as climate change, and the extreme weather events that accompany it, continue to disrupt the global delivery system for goods in highly unpredictable ways, economists and trade experts warn.”[3] Too few companies map their supply chains all the way to where their raw materials are sourced. Such an activity can be enlightening. Rozsa reports that Thomas Goldsby, the Dee & Jimmy Haslam Chair in Logistics at the University of Tennessee’s Haslam College of Business, requires his undergraduate students to select a company and try to map its supply chain. Rozsa explains, “Its purpose is to illustrate the complexity of the various trade routes that bring products from all over the world to consumers. The assignment is to figure out how far the students can trace the supply chain — if possible, going back to the exact point when the raw materials were extracted.” Goldsby told Rozsa, “When my students have had an opportunity to present their results to the companies and the products that they produce, the company executives learn something every time.”
Such exercises will become more important as the threat of extreme weather events increases around the world. Over the past few years, we’ve witnessed the devastating consequences of drought that have not only affected the agricultural sector but logistics as well. Most recently, drought conditions in Panama limited the flow of ships through the Panama Canal. Back in 2022, the Mississippi, Yangtze, and Rhine rivers all experienced serious logistic bottlenecks due to drought conditions. Ewan Thomson, a climate economics analyst, reports, “Droughts are becoming more frequent and lasting longer as climate change increases global temperatures and makes water availability more unpredictable. Droughts are up by nearly 30% since 2000 — in both number and duration — compared with the previous 20-year period.”[4] He adds, “This has potentially alarming consequences for global trade — when water levels are too low to facilitate the movement of vessels, the supply chain breaks down. And that can be expensive.”
At the other end of the spectrum, extreme weather can result in too much water. Rising seas and flooding can also adversely affect logistics. Brian Enright, Chief Executive Officer and Managing Director for the Americas Region of DP World, explains, “Severe weather events and changing climate patterns are forcing international logistics and trade organizations to confront very real, multifaceted economic and operational challenges. The rise in sea levels, a primary consequence of the altered climate, has increased by approximately eight to nine inches since 1880. There has been a noticeable acceleration in recent years, with elevated tides and storm surges that are rendering coastlines susceptible to inundation. … As the World Trade Organization stated in its 2022 World Trade Report, it’s ‘clear that trade and climate change are deeply intertwined.'”[5]
Of course, droughts, rising seas, and flooding are not the only climate-related risks facing supply chains. This year is predicted to have an active hurricane season. Tornadoes are becoming more routine and spreading to new areas. This summer a heat dome settled over much of the United States which impacted working conditions. The effects add up.
Adapt or Die
In an email sent earlier this year, my friend Thomas P.M. Barnett, the Principal Business Strategist at Throughline, wrote, “It has been long noted that investment in climate change-related projects overwhelmingly favors mitigation over adaptation — basically a 90/10 split. But more and more we’re hearing about investors and financial firms waking up to the benefits — and profits — associated more with adaptation.” As Charles Darwin discovered, the species best able to adapt to changing circumstances is the species most likely to survive. The same holds true with companies. Unfortunately, Stockholm Environment Institute (SEI) Policy Fellow Mikael Allan Mikaelsson believes too few companies are prepared to adapt to climate change. He notes, “Existing data suggests a glaring lack of preparedness among businesses for handling these emerging risks. Only a minority of companies have implemented robust plans to manage climate impacts, indicating a crucial gap in corporate risk management strategies.”[6] He believes governments might have to spur companies to adapt by enacting policies that require companies to take proactive adaptation measures (e.g., mechanisms such as mandatory due diligence on adaptation and incentivized public procurement). He adds, “Despite the clear risks, several barriers hinder effective business-led adaptation. These include the perceived irrelevance of immediate climate risks, insufficient climate data, and the high costs associated with implementing adaptation strategies.” To understand how your company must adapt to survive during the coming years, Bindiya Vakil, CEO and Co-founder of Resilinc, suggests adopting the five following strategies.[7] They are:
1. Invest in Multi-Tier Mapping. Like Professor Goldsby’s assignment for his undergraduates, Vakil believes every company should map its supply chain. She writes, “By mapping the supply chain’s intricate layers, businesses can gain visibility into the complete picture of their supply chain, including the origins of components and raw materials. Mapping also enables companies to preemptively relocate high-risk products (ahead of a storm), identify alternative production sites, and swiftly redirect operations in response to an extreme weather event.”
2. Monitor Current Events. Vakil explains, “With the supply chain mapped, another key to minimizing risk lies in monitoring for potential disruptions that could affect a company’s supplier network. There are technology-based supply chain risk monitoring services that leverage AI to scan millions of news sources for risk events — including hurricanes, floods, droughts, and fires.”
3. Conduct Supplier Risk Assessments. Vakil writes, “Consistently evaluating how equipped suppliers are to handle extreme weather events is crucial to business continuity. … By conducting these assessments, organizations can identify suppliers with robust preparedness strategies as well as those requiring improvements.”
4. Leverage Historical Data. According to Vakil, “By studying past disruptions, companies can identify vulnerable points within their supply chain. This analysis is especially valuable in learning which locations are more susceptible to weather-related disturbances. According to a study Resilinc conducted with the University of Maryland’s Supply Chain Management Center and Earth Systems Science Interdisciplinary Center, only 11 percent of supply chain sites are fully prepared for disruptive weather events due to climate change.”
5. Develop Comprehensive Backup Plans. “No weatherproof strategy is complete without a robust contingency plan,” Vakil writes. “In the face of severe weather, employees need clear directives. A comprehensive playbook should outline protocols to be followed when an organization’s supply chain is hit by an extreme weather event.”
I would add a sixth strategy: Explore how your company can adapt its operations and facilities to climate change conditions. As Mikaelsson concludes, “It is imperative for both policymakers and business leaders … to forge robust adaptation strategies that safeguard essential supply chains against the inevitable impacts of climate change.”
Concluding Thoughts
According to Rozsa, “The most obvious solution to this problem, naturally, would be for world leaders to take global warming seriously and do whatever it takes to both reduce greenhouse gas emissions and fix the damage already done to our planet. Frustrating though it may be, however, there are practical geopolitical realities which strongly suggest this may not happen.” That makes climate change adaptation an imperative for most companies. Vakil concludes, “Navigating the unpredictable terrain of extreme weather disruptions demands a multifaceted approach. By enhancing supply chain visibility, fostering strong supplier relationships, and leveraging advanced monitoring and planning techniques, businesses can swiftly mitigate the impacts of extreme weather events. With climate risk-related events on the rise, technology-driven risk management tools and data are becoming indispensable. By adopting these strategies, companies can stay one step ahead of unforeseen circumstances and ensure resilience in the face of storms.”
Footnotes
[1] Elise Leise, “McKinsey: Will Climate Change Affect Your Supply Chain?” Supply Chain Digital, 16 August 2021.
[2] Matthew Rozsa, “Thanks to climate change, supply chain disruptions are poised to be the new normal,” Salon, 15 August 2021.
[3] Ana Swanson and Keith Bradsher, “Climate Change Could Worsen Supply Chain Turmoil,” The New York Times, 8 September 2022.
[4] Ewan Thomson, “Droughts are creating new supply chain problems. This is what you need to know,” World Economic Forum, 25 October 2023.
[5] Brian Enright, “Navigating Global Supply Chains’ Rising Tides,” Forbes, 7 February 2024.
[6] Staff, “Climate disruption of supply chains: why business-led adaptation is needed in the Nordics,” Stockholm Environment Institute, 9 May 2024.
[7] Bindiya Vakil, “Weatherproofing Supply Chains: 5 Strategies to Mitigate Extreme Weather Risks,” Sourcing Journal, 29 August 2023.
