5 Ways to Strengthen Supply Chain Resilience Amid Growing Climate Risks

Global warming will likely exacerbate supply chain disruptions. Use these 5 steps to strengthen resilience amid growing climate risks

Supply chain delays and disruptions borne out of the COVID-19 pandemic remain elevated¹ and are expected to stay that way through 2023 due to a variety of persistent global factors.² Climate change, and its impact on natural catastrophes, also threatens to add new forms of volatility to the current worldwide supply chain quandary.

Global warming will likely exacerbate already over-stressed supply chains with more severe consequences and longer-term risk. In this volatile, uncertain and complex environment, risk managers should take action to strengthen their supply chain resilience.

What’s at Stake?

By 2050, global average temperatures are estimated to be at least 1.5 degrees Celsius warmer (compared to the period 1850-1900) and are expected to cause multiple unavoidable climate hazards – many of which have already been observed and are likely to occur with increasing frequency.

According to Aon’s 2021 Weather, Climate and Catastrophe Insight Report, these hazards include:

• More intense events that damage critical infrastructure which will affect road, air and maritime logistics routes as well as public service infrastructure such as hospitals, schools or roads
• Direct damage to manufacturing facilities or equipment
• Reduction in employee productivity
• Increased market prices for labor, energy and logistics (such as transport)³

Many industries beyond transportation and logistics have already been impacted by the increased frequency and severity of severe weather events, including agricultural, life sciences, natural resources and construction supply chains.

Climate projections tell us that such climate-related disruptions will only intensify as global temperatures reach or overtake the 1.5-degree benchmark set by the Paris Agreement. For businesses, there is a distinct threat to most of the world’s 2,738 seaports posed by rising sea level increases of an estimated two to six feet – and perhaps higher – by 2100.⁴ Rail lines, highways and other integral elements of the transportation and supply infrastructure are also at risk from rising sea levels, but excess rainfall and drought will also play a key part in forcing the adaptation of our global supply chains.

How Will This Affect Businesses?

The risk of supply chain disruptions has caught the attention of global business leaders. Indeed, supply chain or distribution failure rose to the eighth top business risk – up from 19 just five years earlier, according to Aon’s 2021 Global Risk Management Survey. Data from the survey reinforces the need for leaders to take action to manage this evolving risk:

• Loss of income from supply chain disruptions rose from 21 percent to 35 percent from 2020 to 2021, whereas risk readiness declined from 70 percent to 63 percent, revealing a growing protection gap
• Expected losses from supply chain disruptions equal 42 percent of one year’s earnings before interest, taxes, depreciation and amortization (EBITDA), on average, over the course of a decade
• Every year, at least one in 20 major supply chain failures costs a company more than $100 million

Liquidity strategies based on the use of reduced inventories and “just-in-time” fulfillment processes have increased exposure to disruption. Repercussions include fines for companies missing deadlines, empty shelves for consumers and extensive delays for components of larger products — all of which impact a company’s reputation and bottom line.

Five Ways to Strengthen Supply Chain Resilience

Risk buyers are encouraged to work with the C-suite to build resilience into their supply chains through these five steps:

1. Identify and assess your macro exposures to extreme weather conditions, environmental and climate projections as well as political unrest, to help protect assets from sea-level rises, wildfires, and other climate-related perils.
   • Globally, there were 50 individual billion-dollar natural disaster events in 2021, well above the average of 38 dating to 2000. All but three were weather or climate-related events.
   • As sea levels rise, roads, bridges, subways, water supplies, oil and gas wells, power plants and seaports are all vulnerable to flooding. Even on a pathway compatible with the lowest possible greenhouse gas emissions of 1.5%, global mean sea level would still rise about one meter by 2100.
2. Identify and mitigate a range of diversity and inclusion and human rights issues connected to supply chains, modern slavery, child or forced labor and human trafficking.
   • In June 2022, the United States Customs and Border Protection (USCBP) began to enforce the Uyghur Forced Labor Prevention Act (UFLPA), which prohibits the import of goods made in the Xinjiang Uyghur Autonomous Region of China (XUAR) into the U.S.
   • The UFLPA is the latest example of laws aimed at improving transparency around how companies address human rights abuses and unlawful labor practices within supply chain networks. Learn more about the UFLPA and how businesses can prepare for potential future supply chain and human rights reporting regulations.
3. Where there is a concentration of exposure, consider de-risking your supply chain by re-engineering where possible, managing risk and assessing the role of contracts and agreements as a tool for risk management.
   • Conduct a vendor resiliency analysis to verify whethercritical vendors can continue to support your organization in the event of acrisis. This helps enable a better understanding of an organization’s risk relative to its external suppliers and provides information needed to addresssupply chain issues and corresponding losses of vendor support.
4. Explore how you can align existing supply chain processes and procurement operations with your insurance, risk management and finance teams to provide a range of cost and production efficiencies.
   • Asorganizations deal with physical changes and a transition to a more sustainablebusiness, they need to align the impacts of climate change to balance sheetsolutions that can reduce volatility. Climate change requires a forward-lookingapproach and the assessment of the “more intangible” transition risks.
5. Discover how you can match insurer capital to current and emerging exposures through improved risk insights across key suppliers and third parties. This could include, for example, captive insurance companies or index-linked, parametric solutions.
   • Consider Trade Disruption Insurance as a risk solution to help mitigate some of the impacts of supply chain volatility. It’s a specialized named-peril form of insurance that addresses some of the vulnerabilities associated with cross-border supply chains by providing coverage for some of the gaps in property and marine programs.

Climate change is driving the largest reallocation of capital in history and will introduce new forms of volatility, but also many opportunities, from economic transformation, elevated and unpredictable physical risk and new, heightened reputational standards.

Work with a broker who can ensure you receive solutions at each stage of your journey to addressing climate change risks and opportunities.

¹ Supply chain disruptions up 46% year-over-year | Supply Chain Quarterly
² Study: Supply chain crisis to continue through 2023 | Supply Chain Quarterly
³ 2021 Weather, Climate and Catastrophe Insight | Aon
⁴ How Climate Change is Disrupting the Global Supply Chain | Yale Environment 360