PwC: Supply Chains Threatened by Six-Degree Global Warming

PwC: Supply Chains Threatened by Six-Degree Global Warming

Risk ready: New approaches to environmental and social change

Some 85 percent of companies have more complex supply chains as a result of globalization, and adjusted climate forecasts mean businesses should expect climate change to have an even more destructive effect than previously assumed on supply chains, assets and infrastructure, according to two reports from PricewaterhouseCoopers.

The first PwC report, 10 Minutes – Risk ready: New approaches to environmental and social change, says many companies now view preparation for climate change as not only an indicator of resilience, but also as a competitive advantage.

The report, published as the northeast begins recovering from Hurricane Sandy, says the ability to anticipate — and plan for — potential weather disasters is vital. Companies should embed sustainability practices into their business models to mitigate the risks associated with these major weather events.

One way to build resilience is to increase buffers — the margins that provide short-term space needed to absorb shock after a disaster. PwC uses PG&E as an example of how to put these buffers in place.

Because California’s temperatures rise between May and October, which means higher electricity demand, the utility implemented a voluntary program for small commercial and residential customers who agree to shift their power use in exchange for discounts. PwC reports there are 25,000 PG&E customers participating, resulting in a 16 percent reduction on high-load days.

Natural disasters are costly, PwC says, and only 33 percent of $380 billion lost in 2011 to natural disasters was covered by insurance. Natural resources like water and energy continue to be strained, and working closely with suppliers can help pinpoint issues.

PwC’s warnings are playing out in real time, with companies from Amazon to railroad firm CSX telling customers to expect delays on shipments as Hurricane Sandy continues to back up supply chains and slow deliveries leading into the holiday season. Some economists say Sandy’s total impact on the US economy could total up to $45 billion in damage and lost production, with the losses from closed businesses and drops in consumption possibly outweighing the cost of physical damage.

Looking ahead, companies need to address the early environmental warning signs and identify areas of risk, the report says.

Meanwhile, a separate PwC report says the world is heading for a six-degree rise in temperature by the end of the century. The PwC’s Low Carbon Economy Index 2012 says that governments’ ambitions to limit warming to 2 degrees Celsius appear highly unrealistic. Companies can no longer assume the 2 degree increase as a default scenario, and investments in long-term assets and infrastructure, particularly in coastal and low-lying areas, need to address a more pessimistic outlook.
Sectors dependent on food, water, energy or ecosystem services need to scrutinize the resilience and viability of their supply chains, while carbon-intensive sectors need to plan for more invasive regulation and the possibility of stranded assets, PwC says.

Drought, poor quality, flooding and other water-related challenges negatively affected 53 percent of the world’s largest listed companies in the past five years, up from 38 percent last year, yet there’s been no increase in the number of corporations providing water-related risk assessments to investors, according to an October report by the Carbon Disclosure Project.

In September, CDP’s 2012 Global 500 Climate Change report found 81 percent of reporting companies have identified physical risks from climate change, compared to 71 percent in 2011, with 37 percent perceiving these risks as a “real and present danger,” up from 30 percent in 2011 and 10 percent in 2010.