How to Mitigate Climate Risk in Your Supply Chain

As climate change increasingly impacts global operations, businesses must take proactive measures to safeguard their supply chains. From extreme weather events like floods and wildfires to rising sea levels and heatwaves, climate-related risks are no longer distant concerns—they are here and now. In light of these challenges, companies need to adapt their strategies to ensure resilience, continuity, and long-term sustainability within their supply chains.

Understanding Climate Risks to Supply Chains

Climate risk can be categorized into two main types: physical risks and transition risks.

Physical Risks
These include both immediate threats and long-term changes caused by climate change:

• Extreme Weather Events: Hurricanes, floods, and wildfires can damage infrastructure, disrupt transportation, and halt manufacturing.
• Chronic Climatic Changes: Rising sea levels, temperature increases, and shifting rainfall patterns can affect agricultural productivity and the availability of raw materials.
• Resource Scarcity: Water shortages and soil erosion impact industries that rely on natural resources, such as agriculture and manufacturing.

Transition Risks
These arise from the shift to a low-carbon economy:

• Regulatory Changes: New laws and emissions standards can change the cost structure of production and logistics.
• Market Shifts: Consumers are increasingly demanding sustainable products, forcing businesses to adapt to these preferences.
• Technological Changes: Innovations in green technology may make current systems outdated or costly to maintain.

Why Climate Risk Should Be a Priority for Supply Chains

Ignoring climate risk can have significant consequences for businesses. The World Economic Forum has highlighted the potential impacts of climate change on supply chains in its Global Risks Report 2025. Here are a few reasons why addressing climate risk is critical:

• Financial Exposure: Climate-related disasters can result in substantial financial losses. In 2023, climate disasters caused over $250 billion in global economic losses. Unprepared supply chains exacerbate these financial impacts.
• Operational Disruptions: A single point of failure in a global supply chain, such as a factory shut down by extreme weather, can trigger ripple effects across industries.
• Reputational Damage: Consumers and investors are increasingly holding companies accountable for their environmental impact. Failing to act on climate risks can damage a company’s reputation and shareholder trust.
• Regulatory Compliance: Governments and international bodies are tightening regulations around sustainability. Companies that don’t keep up risk legal penalties and loss of market access.

The Ways Climate Change Disrupts Supply Chains

Climate change presents a variety of challenges across the entire supply chain, from transportation to production:

• Transportation and Infrastructure: Extreme weather like floods and storms can damage critical infrastructure, delaying shipments and disrupting logistics. For example, Hurricane Ida in 2021 caused major delays across U.S. logistics networks.
• Disrupted Sourcing and Production: Unpredictable weather conditions affect agricultural outputs and production locations. For instance, rising temperatures are making coffee and wine production less reliable in certain regions.
• Labor Force Instability: Extreme heat and natural disasters can jeopardize worker safety and productivity, especially in regions with limited infrastructure or healthcare.
• Upstream Supplier Fragility: Climate events don’t always directly affect your operations, but they can disrupt tier-three suppliers far away, leading to parts shortages or delays.
• Inventory and Demand Uncertainty: Climate change can shift consumer demand unexpectedly. For example, extreme winters may cause a spike in demand for heating products, while floods may reduce inventory availability.

How Supply Chain Professionals Can Manage Climate Risk

To navigate the risks posed by climate change, supply chain professionals must adopt proactive strategies. Here are several key actions that can help mitigate climate risk:

1. Conduct Climate Risk Assessments
Start by identifying physical and transition risks across your supply chain. Use tools like GIS mapping and climate scenario modeling to:

• Pinpoint areas at high risk for disruptions.
• Assess risks across various supply chain tiers, not just immediate suppliers.
• Prioritize regions and products with the highest exposure to climate threats.

2. Diversify Suppliers and Sourcing Locations
Relying on a single region or vendor increases vulnerability to climate-related disruptions. To reduce risk, diversify your sourcing locations and choose suppliers with strong climate resilience practices. Consider:

• Regional diversification to protect against localized climate events.
• Multi-sourcing critical components to avoid single points of failure.
• Selecting suppliers based on their climate adaptation strategies.

3. Invest in Real-Time Monitoring and Predictive Analytics
Technologies such as AI, IoT, and machine learning can help monitor weather patterns, logistics networks, and potential disruptions. This allows for:

• Real-time tracking of shipments and immediate alerts about disruptions.
• Predictive inventory and demand forecasting based on climate scenarios.
• Early warning systems for extreme weather events, enabling timely action.

4. Build Inventory Buffers and Strategic Stockpiles
While maintaining lean inventory is cost-effective, it makes supply chains less resilient. In high-risk areas, consider maintaining buffer stocks or relocating key inventory to safer locations to ensure continuity during crises.

5. Collaborate Across the Ecosystem
Engage with NGOs, government agencies, and industry peers to bolster systemic resilience. This can include:

• Participating in climate resilience initiatives.
• Advocating for infrastructure investments that improve climate preparedness.
• Sharing climate-related data and best practices across your supply chain network.

6. Implement Sustainable and Adaptive Design
Designing adaptable products and processes is crucial for mitigating climate risk. This includes:

• Using recyclable or climate-resilient materials in production.
• Nearshoring or reshoring supply chains to reduce vulnerability to distant disruptions.
• Creating modular product designs that can be easily adapted during supply chain disruptions.

Conclusion

As climate change continues to affect global supply chains, businesses must act now to protect their operations from both immediate and long-term risks. By diversifying suppliers, investing in real-time monitoring, and building resilient inventory systems, companies can better navigate the uncertainties posed by a changing climate. Taking these proactive steps will not only safeguard your supply chain but also provide a competitive advantage in an increasingly eco-conscious marketplace.