On Aon Insights: Climate and Supply Chain

November 14, 2023 7 mins

On Aon Insights: Climate and Supply Chain

Host and Aon’s Chief Marketing Officer, Reinsurance Solutions, Alexandra Lewis, is joined by Aon’s Global Head of Climate Risk Consulting, William Bruce to discuss how supply chains and climate risk are increasingly linked together.

Key Takeaways

This episode addresses the intersection of climate risk and supply chains.
Aon experts provide insights into the need for organizational changes when considering climate risk.
This episode presents a recap of climate risk and supply chain strategies.

Alexandra Lewis:
Welcome to the On Aon Insights Podcast, where we explore the hot topics surrounding the issues that matter to you. Today, our world is more volatile than ever. We’re overloaded by data and compounded by complexity and uncertainty. Important decisions are often being made without the right information, the right insight and, more importantly, the right advice. This is where we come in. From traditional areas like risk and health to new challenges like technological and digital disruption, we’ll bring together Aon thought leaders and industry subject matter experts to give you the clarity and the confidence to make better decisions. This season, we’re exploring ESG – the world of Environmental, Social and Governance issues.

Today, supply chains are increasingly sophisticated and just as vulnerable. To meet demand for instant delivery and real-time updates, supply chains must be spread around the globe in highly complex systems. But what happens when climate change meets supply chain? For many organizations, with vast networks of suppliers, climate change can cause major interruptions or breakage. We asked William Bruce, Global Head of Climate Risk Consulting at Aon, how supply chains and climate change are increasingly linked together.

William Bruce:
Climate, when we think about it from a physical risk and from a transition risk perspective and all the other considerations, whether it's reputation or legal liability or anything like that, is an ever-evolving constant. We're never going to fully fix it and it's always going to evolve and it's always going to change. And consequently in my view, for companies' risk registers and their current risk profile and risk exposures, climate is a factor that is going to decrease and is going to increase some of the existing risks that have already been identified.

I think climate should be viewed as an umbrella over a risk profile of an organization and it will impact various risk exposures to a greater or lesser extent depending of course on the industry and the sector and the locations. So in my view, I think climate risk is a consideration that needs to be taken into account proactively, but as an amplifier for existing risk exposures.

Alexandra Lewis:
As a result of this link, many organizations are taking a hard look at their supply chains. Now, when organizations are considering suppliers and their goods, credit, and security, climate risk must also be in the mix. And this may mean making significant changes. Will explains.

William Bruce:
So to give you an example in the food and retail sort of grocery industry, currently a lot of tomatoes are sourced from southern Spain. Well southern Spain is forecast to experience a lot more drought events and more extreme temperature, which makes growing tomatoes frankly more expensive and less favorable. So there are now companies and clients are beginning to think about, "Well where am I going to be able to source tomatoes in the next decade? And if it's not southern Spain, then where?" So that gives you a classic example of how supply chains are beginning to move. And for many organizations, supply chains can be quite flexible and so they're able to make those. For other industries, pharmaceuticals for example, are very rigid supply chains because you've got to go through a whole bunch of regulatory tape in order to be able to change suppliers.

Alexandra Lewis:
Overall, companies are looking to make their supply chains more resilient. The last few years of pandemic, political risks, and climate change have highlighted why this is important. Will sees this push towards resilience spreading across all aspects of the supply chain.

William Bruce:
I see there being much more of an increased focus on making supply chains more resilient. And that may translate to anything from physical risk measures to improve specific sites against potential acute risks. It may require dual sourcing of potential supply and having contingencies available, but certainly an increased level of resilience. That may require changes in the design of the supply chain and more insourcing and making suppliers in closer proximity or it may not, but nonetheless a focus on the longer term.

I think it's clear that the various reporting standards and templates and guidelines are going to be superseded and usurped and replaced by the ISSB, the International Sustainability Standards Board. And that should continue to drive proactive risk assessment from a climate perspective and therefore to continue to act as the stick for organizations to do something. I also firmly believe that there is huge value over and above the compliance tick box exercise potentially or the compliance, but more value over and above than meeting compliance standards through going through this exercise and to understand what your risk exposures are.

Alexandra Lewis:
To get started on boosting your chain’s resilience, the first question to ask is: How exposed is my supply chain? With global supply chains, it’s helpful to focus first on the most critical suppliers. What kind of physical risk could they be exposed to? How would this risk interrupt the flow of supply? Plus, understanding a supply chain’s carbon footprint is essential. What are the C02 emissions from the supply chain? What kind of costs may be associated with these emissions in the future, as we transition to net-zero operations? And finally, organizations can build supply chain risk assessment into an overall enterprise risk management framework. By including climate as a factor in supply selection, this will strengthen the supply chain in years to come. Will explains.

William Bruce:
There is a growing appreciation that as climate change starts to manifest in these more extreme weather events, the difficulty is understanding or one of the characteristics of that is going to be the unpredictability with which these events are going to occur. And I think clients do appreciate that, but perhaps don't fully understand how pervasive physical climate risk will be. I think from a transition perspective, there is less appreciation of the potential impact that that will have on supply chains.

Alexandra Lewis:
Let’s have a quick recap of what we’ve learned. Climate is a risk amplifier for supply chains, and their physical and transition risk. Climate risk should be a consideration when sourcing suppliers. Building resilience into the supply chain is a priority now and in the future. Assessing a supply chain’s exposure is the first step in building that resilience. And this tie between climate risk and supply chains should be built into an organization’s overall risk strategy.

Thanks for joining us at On Aon Insights. And thanks to Aon’s William Bruce for his expert take on the topic. We’ll be back soon with another episode exploring ESG and Climate. Remember to check our show notes for recommended reading and places to learn more. And don’t forget to rate, review and subscribe to the podcast. Until next time.

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