Climate change will disrupt supply chains much more than Covid — here's how businesses can prepare
- Wildfires in the American West, flooding in China and Europe and drought in South America are already disrupting supplies of everything from lumber to chocolate to sushi rice.
- Top strategies to mitigate supply-chain risk are often referred to as bridging and buffering.
- But the best way for a company to protect itself and its supply chain is to be proactive in reducing its own carbon footprint, argues John Sterman, professor of management at MIT's Sloan School of Management.
The onset of the coronavirus pandemic caused unprecedented, worldwide supply-chain disruptions, but experts say that's a drop in the bucket compared with the disruptions that climate change will cause.
Wildfires in the American West, flooding in China and Europe and drought in South America are already disrupting supplies of everything from lumber to chocolate to sushi rice.
"Whether you're in the agricultural sector or the forestry sector, or in the tech sector, there is really no particular sector that is immune from climate change," said Christy Slay, senior director of science and research applications at The Sustainability Consortium.
Take, for example, lumber. About a quarter of the lumber consumed in the U.S. comes from Canada, which is seeing severe drought and wildfire conditions.
"The wildfires burning in Western Canada are significantly impacting the supply chain and our ability to transport product to market," Canadian lumber producer Canfor Corp. said in July. "As a result, we are implementing short-term production curtailments at our Canadian sawmills."
The homebuilding industry is already suffering severe supply-chain issues due to Covid, and fires are only exacerbating that.
"Wildfires in the West and Canada are a challenge for lumber production. While prices have come down, the building material supply chain remains vulnerable to disruption," said Robert Dietz, chief economist for the National Association of Home Builders.
Brazil is now suffering its worst drought in more than a century. That, in part, caused the price of coffee futures to soar in July, nearly double what they were the previous year. While the increase has not been passed on to the consumer yet, experts say it will be shortly.
Even sushi rice is getting hit. Two-thirds of America's is grown in California, which faces water shortages due to drought and the wildfires. Rice production involves massive quantities of water.
Extreme weather events also hit supply chains when workers are unable to physically get to their jobs. Workplace disruptions caused by climate change could lead to more than $2 trillion in productivity losses by 2030, according to a recent report from the United Nations Development Program.
Getting ahead of the problem
To manage these effects, businesses will need to be proactive.
"That means being really innovative and creative and doing a lot of supplier engagement that maybe you haven't done before and as a company," said Slay. "So really getting to know your supply chains, really getting to know what those suppliers are doing to mitigate climate change, and building bridges with them, and working together with them to create a comprehensive strategy for the company."
Students at MIT recently did a study on the effect of climate change on mint for Colgate Palmolive and recommended the company engage in risk mitigation beyond its current five-year horizon, moving to a 20-year plan.
"It's obvious that the impacts of climate change that we're already experiencing today, wildfires, drought, extreme weather, more intense hurricanes, crop yield declines, water shortage and the political disruption that comes from the forced migration and political instability it generates — these are enormous stress to many supply chains of companies, and not just companies that are making physical products but in finance and services," said John Sterman, professor of management at MIT's Sloan School of Management and co-director of Sloan's sustainability initiative.
Top strategies to mitigate supply-chain risk are often referred to as bridging and buffering. Bridging means bridging the gap with suppliers to make sure communication is strong during a climate crisis. Buffering means having some products in reserve as a buffer and having backup suppliers should the main ones fail.
But Sterman argues that the best way for a company to protect itself and its supply chain is to be proactive in reducing its own carbon footprint.
"What you want to do as a company is find ways to cut your emissions that also improve your resilience and generate other benefits for you, so that the risks that you face are lower," he said.
He cites Credit Human as an example. It just completed a new headquarters building in San Antonio that is highly energy efficient. It has a huge solar array on the roof as well as ground source heat pumps. During the deep freeze in Texas in February, the building was fully operational, while others around it were not.
Another example is Apple, which has pledged to cut emissions from its supply chain to net zero by 2030.
"This means they are taking a hard look at all their supply-chain partners, trying to find ways to cut the emissions that they generate, but in doing so they are also dramatically lowering their risk for disruptions in the energy supply," Sterman said.
"We don't have any time to waste to cut our emissions, and there's going to be nowhere to hide if we let warming proceed at the rate it's going right now."