A new report by S&P Global suggests that companies could be overlooking a crucial component when conducting climate-risk analysis.
This oversight could disrupt their value chains, leading to lost inventory, jammed operations, inflationary pressures, and logistical bottlenecks as consumers wait for their goods and services.
A value chain refers to every action a company takes to create, deliver, and support its product or service, according to Global Trade Magazine, which did a deep dive into S&P Global’s findings. Because of this, climate risk is not confined to a company’s own operations and assets.
In Brazil, for example, a 2024 flood in Rio Grande damaged roads, airports, and seaports, halting exports of lucrative agricultural products such as tobacco, wheat, and soybeans and making both a medium-term and long-lasting economic impact on the area.
Last year, natural disasters caused an estimated $320 billion in economic losses worldwide, according to multinational insurer Munich Re, which referred to the losses as “considerably higher than the inflation-adjusted averages of the past 10 and 30 years.”
Understanding a problem is the first step to taking constructive action. If companies fail to account for value chain-related climate risks, it could leave the global economy in an even more dire state, resulting in shortages of essential goods and services and a reduced quality of life.
S&P Global analyzed how 29 sectors with at least some value-chain risk would fare if physical climate hazards — defined as extreme heat, extreme cold, wildfire, drought, water stress, coastal flooding, fluvial flooding, pluvial flooding, and storms, per Global Trade Magazine — continued becoming more frequent and severe.
It estimates that the world could lose 4.4% of its GDP by 2050 if it fails to limit rising global temperatures to well below 3.6 degrees Fahrenheit (2 degrees Celsius).
As it stands, only around 20% of companies have adaptation plans, and less than half of those businesses intend to enact those plans over the next 10 years, per Global Trade Magazine.
However, companies that invest in adaptation plans will be better prepared to quickly and effectively respond to climate-related challenges, thereby minimizing the potential impact on consumers and their bottom lines.
“The adaptation and resilience interventions required by companies will vary. They will depend on where the companies’ assets are located and the sensitivity of those assets to climate hazards,” Global Trade Magazine explained.