Supply Chain Resilience Central to Managing Climate Change Risks

The coronavirus pandemic has exposed the vulnerability of global supply chains, as well as the risks and obstacles that supply chain executives and managers contend with every day. But climate change, even more than COVID-19, is a particularly challenging disruptor to supply chains — and its impact is growing more pronounced.

A company’s supply chain consists of the suppliers providing materials, goods and services necessary for it to operate smoothly. It includes the company’s immediate supply base — meaning the suppliers it does direct business with — as well as the suppliers of those direct suppliers. The supply chain of a canned beverage company, for example, includes the metal can manufacturer, as well as the metal mining company that supplies the can-maker.

Our broader research on supply chains in the climate change era makes clear: Every business’s suppliers must deliver consistently to meet customer demands while keeping costs from spiraling out of control, but climate change is making those two requirements increasingly challenging.

Extreme weather events are becoming more severe and frequent worldwide. Rising oceans are creating new difficulties, since most of the world’s critical shipping hubs are built in low-lying areas, exposing them to the devastating impacts of rising sea levels¹.

Automaker Subaru, for example, shut down two car factories for part of 2019 due to Typhoon Hagibis and the flooding of its part suppliers’ factories. Clothing brands that use suppliers in East Asia routinely experience delays in supply during monsoon season.

Climate risks can create a lack of available supply, lower the quality of supply, increase the cost of supply or delay the delivery of supply, putting the company’s own operations at risk. A business that fails to adapt its supply chain risk management strategy to account for climate change, in fact, may be putting a significant portion of its corporate value at risk².

What’s different about supply chain risk due to climate change compared to other types of disruptions?

First, climate change increases the frequency and scope of acute supply chain disruptions. This requires companies to invest more time and money in their supply chain risk management programs.

Second, it can create chronic changes to supply chains, forcing companies to urgently adapt.

Third, it can create new types of risks that haven’t typically been addressed by supply chain risk management programs. These include disruptions in more places, forced structural changes and greater investor attention and scrutiny on supply chain related greenhouse gas (GHG) emissions.

All of this requires companies to formally and immediately incorporate climate change risks as part of their supply chain risk management strategy.

Two key ways: Bridging and buffering.

Bridging strategies help suppliers handle risks and recover faster from disruptions. The most common bridging approaches involve helping suppliers plan for climate change risks, providing financing or expertise to suppliers and otherwise strengthening the buyer-supplier relationship. This requires businesses to continuously assess the financial health of their suppliers. Indeed, many large companies use services that routinely monitor their suppliers’ finances.

An example of bridging is HSBC Bank’s partnership with Walmart to provide supply chain financing, with preferential pricing to Walmart suppliers working to improve their sustainability performance. The financing puts suppliers in a healthier cash flow position, enhancing their ability to absorb climate-fueled disruptions.

Buffering strategies protect businesses from supplier failures and disruptions. Companies can use inventory buffers, lead time buffers, capacity buffers, liability buffers and cost buffers to galvanize supply chains. Amid climate change, companies are more likely to need buffering strategies, because supply disruptions are inevitable no matter how resilient a supplier is, and the buying business must protect itself.

An example of buffering is a commitment by Starbucks to “make sure 100 million healthy coffee trees get into the hands of coffee farmers that need them by 2025” as world demand for coffee increases³.

Attention to climate change risks will not only strengthen supply chains, but it will also make any organization more attractive to its investors, employees and customers. Investors, in fact, are increasingly focusing on a company’s supply chain-related GHG emissions⁴.

Companies with climate-resilient supply chain management practices also have better operational and financial outcomes, compared to research showing supply chain disruptions lead to significant financial losses⁵.

In order to better plan for the future, companies must formally incorporate climate change risks as part of their supply chain risk management strategies. Doing so will not only make the company’s supply chain more resilient, but it could enhance the reputation of any organization to its own employees, customers and investors, and the public at large.

Read the full report here from The Sustainability Consortium to find out more about how to strengthen your business by making your supply chain more resilient to the effects of climate change. Contact us to discuss your sustainable financing needs.

This article was developed based on content from HSBC's The Sustainability Consortium Report -“Improving Supply Chain Resilience to Manage Climate Change Risks” - June 2020.