Managing supply chains in the face of climate change risk: part 1

By Joelle Pang, Grecia Pacheco and Julie Bourgault | November 25, 2022

In 2016, Canada’s Fort McMurray, in the province of Alberta, suffered an estimated $3.58 billion in damages due to wildfires, and in 2021, floods in the neighboring province of British Columbia (B.C.) forced organizations to reevaluate the threats that extreme weather events posed to their operations and supply chains. Based on current trajectory, GHG emissions will continue to result in severe climate change risk, and with this in mind, organizations need to know how to prepare and keep their supply chains intact.

Within the next five to ten years, climate action failure, extreme weather, biodiversity loss, natural resource crises and human environmental damage will comprise the top five critical threats to the world,[1] making climate change risk an issue that will continue to impact individuals and organizations around the globe.

Climate change risk arises from the effects of climate change that adversely impact livelihoods, organizations, social and cultural assets, infrastructure, services, and ecosystems.[2] With this in mind, effective supply chain management needs to be at the forefront of organizational operations and must be rooted in a resilient strategy that reduces the threat of climate change and successfully measures its effects.

How does physical climate risk impact supply chains?

The environmental effects of climate change can be seen in varying degrees but are most easily evidenced by the increase in frequency, unpredictability, and severity of extreme weather events such as floods, forest fires, hurricanes, and tornadoes.

The Fort McMurray and B.C. wildfires occurred in Canada, largely affecting local businesses in those regions. However, the residual impact from disruptions to Western Canada’s economy were felt beyond the local economies: Lumber shortages impacted construction industries across North America and rail car disruptions slowed exports, resulting in significant cost increases to essential everyday goods across the country.

Similar events are occurring all over the world and consequent impacts have transcended global supply chains. This ripple effect primarily manifests as shortages or drastic price increases of raw material, maintenance parts, and consumables. The recent climate-induced flooding in Pakistan killed 1,739 people, displaced hundreds of thousands, and caused around USD$30 billion in economic losses and damages to homes, agriculture and livestock, infrastructure, and communication sectors.3

The resulting shortages create operational pressures and result in cash flow volatility, which exacerbates transportation bottlenecks and other logistical constraints. In other words: A world in which extreme climate events become commonplace is a world where supply chain disruptions are a leading cause of operational uncertainty. With many organizations intending to achieve net zero GHG emissions by 2050, this ambitious target needs to be met with a simultaneous goal of mitigating physical risks and natural disasters.

What can organizations do?

The best strategies will strengthen resilience and minimize the impact of climate risk-related disruptions within organizations. The first step in developing effective strategy is to assess the financial, operational, and maintenance impacts of any potential climate risk disruptions in order to identify the probability and consequence of the risk occurring.

Depending on the industry and product, physical climate risks can be reduced by:

  • Stringent event planning
  • Emergency simulations with key suppliers to identify how and when they can respond to an extreme weather event
  • Diversifying suppliers to identify strategic primary and secondary suppliers and split critical supply between suppliers to reduce single factory output.

It’s also important to note that by taking a holistic view of the entire supply chain and investigating how individual assets and intermediate steps relate to each other, organizations can begin to understand the significant overall impact that could be caused by compounded disruptions. When taking this approach, looking at risks beyond one degree of separation both upstream and downstream of the supply chain can ensure that risks are fully measured and can be managed accordingly.

Investing in the understanding and anticipation of extreme events can also help organizations to plan proactively and redesign supply chains to remove risks. This can include implementing technology that tracks real-time weather data to better model climate risks and extreme events, and subsequently prepare the end-to-end supply chain to mitigate disruptions.

Ultimately, organizations have both an ethical responsibility and a business interest in reducing emissions throughout their supply chains and simultaneously preparing for unforeseen disasters. Continued GHG emissions will result in increasingly severe climate change impacts, which will result in more frequent and severe disruptive weather events. Doing business and forging societal progress in such an unpredictable world will be challenging and costly, and just as organizations have a responsibility to reduce GHG emissions, they also have a responsibility to prepare for worst-case scenarios.

How can we help?

At Hatch, we have the expertise to simulate and model different climate risk scenarios, impacts, and possible solutions. For example, modeling a greenfield mine to assess the impact of severe rain events and improve preparedness, or modeling transportation routes and developing catastrophic risk maps and proposed mitigation measures.

The importance and resilience of supply chains was brought to light by COVID-19, showing how critical it is to develop resilient and holistic strategies that incorporate innovative technologies. With this as our framework, we can look at the end-to-end supply chain to ensure robustness and develop a risk and transformation road map to reinforce the supply chain.

Hatch can help clients lead in the energy transition. This will require the offset and reduction of GHG emissions while incorporating environmental cost factors into decision making for new assets. Contact us to find out more about how we help our clients manage the offset and reduction of GHG emissions while incorporating environmental cost factors into decision making.

[1] Global Risks Report 2022 | World Economic Forum (weforum.org)

[2] Climate-related risks and extreme events | UNFCCC

3 Pakistan: Flood Damages and Economic Losses Over USD 30 billion and Reconstruction Needs Over USD 16 billion - New Assessment (worldbank.org)