Climate change's disruptive impact on global supply chains and the urgent call for resilience

Today, a billion-dollar extreme weather event occurs every three weeks. Four decades ago, one occurred every four months.¹ These extreme weather events can take many forms, from floods to hurricanes to droughts. Yet, a consistent factor for all is that each makes global supply chains less reliable.

Drought has lowered the water levels of several key waterways in 2023, including the Mississippi, Rhine and Yangtze. Perhaps most notably, it also reduced the water levels in the Panama Canal, which handles about 5% of world trade by volume each year,² causing a reduction in the transit of goods. Conversely, major flooding in Slovenia impacted manufacturing facilities, which led to disruptions in European supply chains.³ Meanwhile, major flooding in India’s Chennai region forced many manufacturing plants to close.⁴

Disruptions caused by extreme weather events are set to remain a key risk in 2024. More disruptions mean longer delivery times, higher costs and lower output. The economic risks of climate change to global trade are predicted to sit around US$81bn. This rises to at least US$122bn when factoring in economic activity linked to industry output and consumption.⁵ Such losses are higher than the individual GDP of Slovakia, Ecuador or Kenya.

Disruptions caused by climate change impact all parts of the supply chain

More than 99% of surveyed executives stated their supply chain is impacted by climate change. Predominantly, disruptions are felt in delivery as both downstream and upstream transportation is impacted. For instance, Hurricane Ian, which struck the Caribbean and the US in September 2022, resulted in a 75% drop in shipments and saw an increase in shipping time by 2.5 days.⁶ Weather is also the cause of 23% of all road delays in the US and costs trucking companies anually between US$2bn and $3.5bn.⁷ This is due to disruptions to work shifts, in-transit holding costs, late fees and customer retention, among others.

The effects move beyond transport to the availability of raw materials, reduced production levels, storage of goods and even consumer preferences. The most obvious is extreme weather's impact on agriculture. One study, focusing on the German economy, found that drought caused damages to winter wheat that exceeded €23mn annually from 1995-2019.⁸ The costs to supply chains as a result of extreme weather are so severe that businesses need to make it a higher priority in their supply-chain strategy.

Companies need to pay more attention to the impacts of extreme weather on supply chains

Less than a fifth of executives ranked global warming and extreme weather patterns as a key reason for pessimism for global trade for 2024 and 2025, losing out to other key factors such as inflation and geopolitics.

Executive action does not paint a better picture. ‘Reduced carbon footprint’ was the main outcome to companies' supply-chain restructuring over the last 12 months for only 14.8% of surveyed companies.

Higher carbon emissions are linked to extreme weather events.⁹ And, supply chains have been estimated to generate about 60% of carbon emissions globally.¹⁰ So reducing the carbon footprint of supply chains will lead to fewer greenhouse gases in the atmosphere and therefore reduce the frequency of these events in the future. While it will take a global effort, if businesses were to reprioritise this it would not only have a significant impact on global emissions but would also lead to faster delivery times, fewer supply disruptions and lower transport costs in future years.

A combination of supply-chain reorganisation and technology is required to overcome the costs associated with extreme weather events

In the short-term, diversification of supply chains will be crucial if companies want to increase resilience against extreme weather events. Focusing production or transportation within a single region or country will leave companies without adequate protection. Diversifying locations and suppliers will help ensure that companies have the necessary redundancy capabilities to withstand disruptions caused by climate change.

Effective monitoring of extreme weather events is also a necessity. Technology is pivotal to this. The Internet of Things, where connected devices are able to communicate through sensors and software, can help increase resilience through monitoring. Next-generation artificial intelligence can also be used for predictive modelling and real-time monitoring, allowing companies to get valuable insights into their supply chain and identify potential risks in advance. Our survey found that 98% of companies are using artificial intelligence (AI) in at least one supply-chain activity, such as forecasting demand or optimising inventories. Their ability to harness the benefits of AI needs to be broadened to enhance their ability to monitor and predict extreme weather patterns.

Data is central to these efforts. But the sharing of data needs to transcend individual companies so that it can be harnessed to monitor and stimulate action across the entire supply chain. One example is the Unilever Climate Promise.¹¹ This initiative was launched with the goal of achieving zero emissions across its operations by 2030 and net zero across its value chain by 2039. To do this, Unilever engaged with their suppliers to establish emission-reduction targets and standardise data sharing and communication.¹²

The cost of not accounting for the impact of extreme weather is consequential for businesses. The first stage is to make it a more central part of supply-chain strategies. This may prompt a redesign of supply-chain networks and greater use of advanced technologies. Doing so would benefit businesses’ short-term and long-term resilience.