Cut climate change risk in four steps

13 January 2020

The recent climate protests around the world are just another indication that the world is changing.

The physical impacts from climate change will be felt most keenly in supply chains; it isn’t enough to be ‘green’ anymore, companies have to begin building more resilience. The following four steps provide an introduction and overview on how to address this challenge.

1. Understand the risks

Extreme weather events have already impacted global supply chains this year, such as flooding and then drought at the Panama Canal, a major trade route, leading to disruptions and higher shipping costs. Shanghai, one of the largest ports in the world, was shut down by intense typhoons. In Pheonix, Arizona, flights were grounded and freight loads were reduced (and were costlier) because raised air temperatures made take off more difficult. Security of supply of key raw materials is also becoming a significant risk, as agriculture and regions experience extreme weather conditions.

In the coming years, it is predicted that weather events will happen more often and will be more severe. The first step is to understand the risks in your supply chain. Ask simple yet fundamental questions: are the raw materials you need at risk of disruption, either through failures in production, manufacture or distribution. Which materials? Where? What are the likely risk factors?

2. Collaborate

Failure to source and distribute products is clearly a core business risk. A multi-disciplinary and collaborative approach is required that will also build capacity and knowledge. The team may need to include representatives from procurement, sustainability operations, logistics, legal and insurance. Consider creating a working group with colleagues across the business and identify and use existing risk control mechanisms that are used by your organisation. Agree clear roles and responsibilities.

It should be noted that collaboration will may also be necessary with key suppliers in later stages of the risk mitigation strategy, as you seek to better understand the challenges, risks and actions they are experiencing. Begin to work with key suppliers to monitor the impacts of climate change, as sometimes these can be slow ‘creeping’ changes that can begin to affect quality and supply.

3. Identify the key risks for your organisation

Even though there is uncertainty in the future impacts of climate change, this should not be used as a tactic to delay. Commit to developing a better understanding of the risks your company is exposed to and how these might change over time. Take the perspective of the entire value chain, not just tier one suppliers, so key catastrophic risks can be identified.

Good practise is to use a set of different climate scenarios, such as best and worst cases, to better understand how the different impacts could play out. Aim to identify the likelihood and magnitude of the impacts. At this early stage, do not aim for perfection. Make a start to identify the key risks and iterate as your understanding develops.

4. Increase your resilience to supply chain shocks

Work with colleagues to identify the actions that could be taken to reduce the main risks. Adapting to climate change can require transformational change or smaller incremental changes; business cases are likely to be required. Building redundancy and flexibility into supply chains many also be necessary.

Create a strategy for your resilience pathway that contains timelines, targets and responsibilities. The strategy should be revisited and updated as new information or experienced impacts become apparent; the approach has to be dynamic. Aim to create a pathway towards resilience that has clear links between timing, actions and responsibilities. Use a document to create further buy-in across the business, including at senior levels. Companies are now using this type of information to engage with investors and insurers who are increasingly wanting evidence on this form of risk management. Start now so that you can stay one step ahead of these impacts.

☛ Paul Taylor is a principal consultant at DNV GL

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