Governments across the globe are springing into action in response to the number of climate events, including requiring businesses to report on climate-related financial risks. These events have incentivized more government action but they should also serve as a wake-up call for businesses to protect shareholder value and top- and bottom-line growth and stability.
In September, extreme weather events caused a state of emergency for local authorities and businesses on both the West and East coasts in the U.S. More than 525,000 homes and businesses were at risk of losing power in California following a record-breaking heatwave and heavy rainfall in New York caused major disruptions to the city’s drainage, transportation and infrastructure system.
Successive government actions have signaled that the world’s largest economy is taking climate change seriously. First, the Securities & Exchange Commission (SEC) proposed the environmental financial disclosure rule. More recently, President Biden’s Inflation Reduction Act marked historic investments in climate protection, including household tax credits to offset energy costs, investments in clean energy production, and company and household tax credits to incentivize reduced carbon emissions.
Manufacturers must address decarbonization and resilience to climate volatility with more urgency. The manufacturing industry consumes 54 percent of the world’s energy sources and is responsible for one-fifth of carbon emissions. While Net Zero has prompted action from many manufacturers, many don’t realize that on its own, Net Zero is not enough. Manufacturers need an adaptation and mitigation strategy to protect their physical assets from accelerating climate events.
Balancing Act
Manufacturing industry is very vulnerable to climate change due to its reliance on supply chains, built assets, as well as natural and human capital. According to a 2020 report by McKinsey Global Institute, damage to capital stock from riverine flooding could double by 2030, and quadruple by 2050.
Yet, many manufacturers have been slow to adopt measures to reduce physical climate risk. A recent survey reveals that nine of ten manufacturing climate decision-makers reported that extreme weather events had already impacted their company’s physical assets over the past five years. However, only slightly more than half (52 percent) said their company has an active plan to modify physical assets or related processes to mitigate damage from an unforeseen climate event.
As part of their adaptation strategies, manufacturers are also looking to work with more sustainable suppliers and find regions or locations which are less exposed to climate hazards. Additionally, many manufacturers are requesting emissions data from their suppliers. McKinsey estimates downstream players in a supply chain could lose up to a third of annual revenue if a climate event disrupts supply. Additionally, they note that a well-prepared company is likely to fare better, losing only about five percent of revenue in a similar circumstance.
Climate intelligence that draws on a unified global asset catalog and petabytes of global climate data provides a unified view of climate risk on physical assets across the supply chain - a view that can be seen and shared by all stakeholders to incentivize collaborative risk mitigation actions. Armed with this new business intelligence for managing asset-level climate risk, companies across industries are accelerating adaptation planning and screening out supply chain risks. For instance, if a screening reveals a high risk rating for a particular supplier over the next five to ten years, the manufacturer can use this intelligence to suggest individual and joint investments in resilience efforts to fortify physical assets critical to supply chain continuity.
With their heavy reliance on production facilities and robust supply chains, manufacturers need to be at the forefront of managing physical climate risk. Importantly, even with governments across the world expected to enact more policies and regulations to address climate change, manufacturers must not wait to act. Climate represents value loss for shareholders, and poses security issues for businesses and communities.
Karan Chopra is the COO of Cervest, a climate intelligence (CI) company.