Adapting to Climate Change: Supply Chain Resilience

ClimateChange_SupplyChain

The recently published Intergovernmental Panel on Climate Change (IPCC) report highlights a number of expected changes in the climate, including the continual shrinkage of arctic ice cover, a rise in average global sea levels, ocean acidification that will impact the food chain and the potential increase in extreme weather events.

We already know from previous decades that globalization and expansion of businesses, including their supply chain, into more hazard prone regions has already caused an increasing trend of economic and insured losses. Coupling these observations with the impact of climate change means these trends are likely to get worse in the near future.

Adaptation is Key

The IPCC report highlights the need to treat climate change as a means of managing the associated risks rather than simply focussing on policies to cut the global carbon dioxide and methane emissions. The fact remains that the damage has been done, so how can we best adapt to it?

What Businesses Ask

This question of ‘climate change adaptation’ rings very true with what we are hearing more and more from Willis’ global corporate client base. Questions that we are frequently hearing from our clients revolve around:

  • What hazards their business is exposed to on both a regional and global scale
  • The potential property damage and business interruption losses that a firm may face if a natural catastrophe was to occur
  • How these assessments compare with the business’ insurance programme and their risk retention levels.

Businesses are also increasingly keen to identify which key parts of the supply chain could be affected by the same natural hazard event and what risk mitigation options are available to reduce this exposure.

Identifying Climate Change Risks

These questions can be answered by a three-tiered approach:

  1. Providing awareness of the hazards a company and its supply chain is exposed to globally.
  2. Once this identification process has taken place, the risk for the company’s portfolio of locations and its supply chain must be quantified.
  3. Finally, a deep-dive assessment of the most vulnerable sites or loss drivers in a portfolio will further help to mitigate the risks for these more exposed locations

The key benefits for companies that already have undergone this process are that they have become far more resilient, prepared and efficient in strategically managing and adapting to the increased risk posed by natural catastrophes, severe weather events, and climate change.

This in turn helps companies to better protect and achieve their financial objectives, for example by using an analytically refined insurance programme that is better designed, stress tested and optimized to deal with the expected increase in severe weather events and climate change.

Physical Mitigation

Outside of insurance, we are also seeing clients improving their operational redundancies by undertaking physical mitigation measures based on the recommendations provided in the deep dive assessment of the most vulnerable sites. For example in areas prone to increased frequencies of floods owing to rivers or coastal surges, critical equipment is raised above predicted flood levels and backup utility and mirrored data storage systems are put in place.

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