Climate-Related Supply Chain Risk: Are You Prepared?

Material supply chain disruptions from extreme weather events can impact the top and bottom line from increased shipping costs, manufacturing delays and commercial liabilities, among others. Companies will benefit from a comprehensive understanding of the various climate-related risks embedded in its supply chain. With these insights in hand, companies can then form and execute an actionable and effective risk mitigation strategy.

While the operational significance of risk mitigation strategies has arguably grown for companies in recent years, so too has the investment community’s focus on related issues. Now more than ever, investors are requesting, and in some cases demanding, companies disclose decision-useful information on material climate-related risks and opportunities.⁷ As with any business imperative, developing an effective strategy takes time. To aid in this effort, below are several well-regarded and frequently leveraged resources on assessing climate-related risks and opportunities.

• The Taskforce on Climate-Related Financial Disclosures (“TCFD”) provides recommendations and technical resources for companies to help identify and disclose its climate-related risks and opportunities. The TCFD’s recommendations, sometimes referred to as a reporting framework, provide a flexible yet specific set of disclosure prompts and accompanying guidance. This allows companies to disclose the findings from its comprehensive climate-related risk assessments, highlight key processes implemented including the company’s approach to governance and oversight, and provide useful metrics or targets being used to track and manage progress over time. The TCFD’s guidance on climate scenario analysis is also helpful, offering companies guidance on stress-testing go-forward strategies – supply chain included – under various climate scenarios. Additionally, the TCFD also publishes annual status reports that include useful insights and summaries of corporate progress on climate-related disclosures. These can often serve as a valuable resource for companies assessing best practices and identifying the optimal path forward.
• EcoVadis supplier assessments are another resource that can provide companies with a systematic, data-driven approach to collecting pertinent information from suppliers related to its climate strategy, resiliency, and overall sustainability. EcoVadis surveys can complement existing procurement audits to identify areas of climate-related risks within the supply chain. In addition, results are provided in the form of a scorecard, which allows for the receipt of comprehensive feedback on the supplier’s sustainability practices. EcoVadis scorecards are valid for one year, but EcoVadis provides requesting companies the flexibility to survey its suppliers multiple times per year to account for any supplier improvements.

Third-party resources provided by the TCFD and EcoVadis can be helpful, but a risk mitigation strategy will require the same level of rigor, seriousness and resources that companies typically deploy for other strategic imperatives. Appropriate and effective attention to the increasingly material risks posed by climate change requires critical and creative thinking and ultimately a strategy suitable for a company’s competitive landscape, competing priorities and stakeholder pressures, unique supply chain characteristics, among other factors.

To this end, among other analyses, a few worth considering include:

• Mapping the end-to-end supply chain to identify operationally critical assets and dependencies vulnerable to extreme weather events. Once identified, this would allow for weather-related risks at the site and/or regional level to inform the creation of a data-driven resiliency plan. Such an assessment can be beneficial for assets and/or primary suppliers located in high-risk geographies, such as coastal or dryland regions, particularly in a situation where sole-source or supply chain concentration risk is present. Similarly, we recommend that an in-depth environmental assessment also be conducted post-disaster to assess weather-related loss and damages to inform future resiliency plans.
• For companies opportunistically evaluating or pursuing acquisitions, designing a playbook for a comprehensive, ESG-focused due diligence process with a heightened focus on supply chains is increasingly critical. An effective due diligence process is underpinned by stress-testing the target’s resiliency to intensified weather events and developing related contingency plans. This can not only reduce medium- and long-term operational risk, but it can ensure a buyer does not overpay for the asset in question, once the appropriate risks are factored in.
• The integration of climate-related mitigation strategies into a company’s broader business contingency plans. This will help ensure situational responses and crisis plans are prepared for weather-related disruptions to operations. Supply chain vulnerabilities can be identified with frequent forecasting and scenario planning, supplier audits and simulations. For instance, this could entail identifying trade route options if primary routes are compromised in the event a drought suspends maritime shipping. This may also include prescreening alternative suppliers if there is a reasonable likelihood that primary suppliers’ assembly plants could be at risk from tropical cyclone patterns, or stress-testing response plans to ensure business continuity in the event a storm takes a storage facility or data center offline.