Climate Risk and Global Supply Chains: How to Champion Resilience When Faced by Natural Hazards

Published on Fri, 12/02/2021 - 15:20
Adriano Lanzilotto, Vice President and Client Service Manager at FM Global
Adriano Lanzilotto, Vice President and Client Service Manager at FM Global

The pandemic has heighted our general awareness of how important it is that businesses maintain resilient global supply chains, writes Adriano Lanzilotto, Vice President and Client Service Manager at FM Global.

Throughout much of the past year, supply chains have focused on distributing PPE and in 2021 they will now play a key role when it comes to the administration of Covid-19 vaccines. Despite their essential nature, more needs to be done to protect our supply chains against the growing threat of climate risk; the design of many global supply chains has focused primarily on developing efficiency rather than resilience, leaving them vulnerable to the hazards that climate change can create.

As we move past the disruption brought on by the coronavirus, addressing how climate risk effects an organisation’s supply chains will be the key to unlocking a resilient future. The World Economic Forum’s Global Risk Perception Survey 2021 demonstrates the importance of this, as 52.7% of respondents believe that extreme weather events present a clear and present danger in the short term.

A recent example of the impact these natural hazards can have was seen this past January, as Storm Christoph brought flooding to parts of England and Wales. These floods almost had a damaging impact on the UK’s Covid-19 vaccine distribution supply chain, with emergency services and on-site employees forced to act quickly to ensure that facilities storing the vaccines weren’t flooded[1]. While damage was prevented, the example clearly highlights how companies and governments alike must strategically consider how to best mitigate climate risk and design supply chains that can withstand unpredictable weather events.

It's possible that many firms are on the backfoot with regards to resilience, as research commissioned by FM Global found that more than three quarters (77%) of CEOs and CFOs of the world’s largest companies admitted their firms were not fully prepared for the adverse financial impact of a changing climate. This was the case even though three-quarters of respondents (76%) agreed that their organisations were somewhat to significantly exposed to climate risk.

There is no time like the present to take steps to build resilience into supply chains, creating systems which can weather the inevitable climate change disruption and maintain an undisrupted flow of goods and services. There is an awareness that this responsibility falls on business leaders: 79% of respondents in the FM Global study believe that executive management should be held accountable for the adverse financial impact of climate risk on their business, which suggests more may be done soon.

The importance of risk assessment

The first step for businesses looking to fortify their supply chains against natural catastrophes should be to research which specific risks could potentially affect their key suppliers and the regions that they’re located in. It is vital that business leaders understand their organisations’ exposure level, as it is a lot easier to implement the right kind of investments in resilience – ones that will deliver the most cost-effective results – when they know which specific risks are present in the areas relevant for them.

Know which solutions fit your needs

Often the most successful solutions to build resilient supply chains are physical loss prevention measures that protect the integrity of a building and the equipment within. These can include measures to strengthen the building envelope which protects against wind damage, or the installation of raised platforms to protect goods from possible flooding.

One example of how effective these solutions can be comes from a spice manufacturing facility FM Global partnered with. The facility experienced two very similar floods roughly a year apart, but with the key difference that when the second flood hit the facility was storing key materials on raised platforms.

This helped to prevent the company suffering around $1m in damage – a clear illustration of how investing in the appropriate protections, backed by site-specific knowledge, can be the difference between a facility experiencing minor losses or being made completely inoperable after an extreme weather event.

Identify your key suppliers

When business leaders analyse the exposure level of their operations, it is vital that steps are taken to identify the suppliers that their organisations are highly dependent on. This knowledge can be critical, as it allows for attention to be focused on where the greatest risks to business continuity are. Rigorous analysis using data-driven risk assessment tools can provide invaluable insight regarding which precise regions, sites, and business partners are vulnerable.

FM Global’s Resilience Index is one tool which can make this process run smoothly, as the index compares the resilience of the business environment of nearly 130 countries around the world. By drawing on the results of drivers that may impact supply chain resilience – control of corruption, quality of infrastructure, natural hazard risk quality, corporate governance and supply chain visibility, amongst the others – business leaders can identify where their operations are particularly vulnerable, and make informed decisions on where greater operational resilience is needed.

To successfully plan for a resilient future, executives must adopt a mindset whereby they internalise the importance of certain key principles. Chief among them is believing in the importance of using data and rigorous analysis to understand their risk exposure. This is particularly important when it comes to fortifying supply chains against the potential disruption brought on by climate change. Natural catastrophes can often hit with little warning: supply chains prepared for a potential worst-case scenario will fare better than those of unprepared competitors, ensuring that a fire, flood, or hurricane doesn’t stop a supply chain from operating.