Supply Chain Risk Management and Climate Change

Stephen DeAngelis

January 27, 2012

Munich Re, one of the world’s largest reinsurers, is paying an increasing amount of attention to climate change. [“How Munich Re Assesses Risk,” by Carol Matlack, Bloomberg BusinessWeek, 2 December 2010] Matlack reports:

“The company has the world’s most comprehensive database on natural disasters, with information going back centuries. It shows that the frequency of serious floods worldwide has more than tripled since 1980, while hurricanes and other severe windstorms have doubled. ‘Global warming is real, and it affects our business,’ says Peter Hoppe, who heads the company’s climate-change research. Munich Re has become a leading advocate for renewable-energy development, even joining a venture that plans to generate solar power in the Sahara and ship it under the Mediterranean to Europe.”

Munich Re obviously has no ideological position when it comes to climate change — it only has the bottom line to worry about. And the bottom line doesn’t look too good when it comes to paying out claims for weather-related damages caused by climate change. I’ve read that most multi-national corporations admit that they have suffered some kind of supply chain disruption due to weather events in the recent past. The staff at SupplyChainBrain writes, “Amid growing evidence that climate change is impacting the global environment and the global economy, the Ceres investor coalition announced a new report aimed at improving corporate disclosure of climate-related risks and opportunities they face.” [“Report Outlines What Companies Should Disclose on Climate-Change Risks and Opportunities,” 2 March 2011] The article continues:

“The Ceres report, developed with input from its 90-plus member Investor Network on Climate Risk, outlines generally weak climate disclosure to date by businesses and steps for improving such disclosure, especially in annual 10-K financial filings. … It comes just a week after the consulting firm Mercer issued a new study warning that climate change could increase investment portfolio risk by 10 percent over the next 20 years.”

Corporations are already starting to feel the heat of increased investor activism and the lack of disclosure about potential risks associated with climate change opens companies up to even more criticism. The article continues:

“‘Adjusting to a world profoundly shaped by climate change is a key challenge for all leading companies,’ said Ceres president Mindy S. Lubber. ‘Ensuring that investors are getting timely, material information on climate-related impacts, including regulatory and physical impacts, is essential. This report sets the bar on what investors expect on climate disclosure so that they better understand which companies are well positioned for the future and which are not.'”

Like Munich Re, Ceres doesn’t take an ideological view of climate change or its causes. It simply accepts the same reality that Munich Re sees and believes that corporations that don’t adapt to emerging challenges are setting themselves up for supply chain disruptions and adverse investor reactions in the future. The article states that “the report, Disclosing Climate Risks & Opportunities in SEC Filings: A Guide for Corporate Executives, Attorneys & Directors, is available at www.ceres.org.” A year before the Ceres report was released, the Securities and Exchange Commission had issued “formal interpretive guidance for companies on climate-related information they should be disclosing to investors in their 10-Ks or 20-Fs, as well as quarterly filings.” The article continues:

“The guidance, issued [in February 2010], capped a multi-year effort by leading investors, state law enforcement officials and others to boost corporate attention to the quality of their climate-related disclosure. The report makes clear that while many more companies are disclosing climate-related information in voluntary reports – such as annual reports, sustainability reports and Carbon Disclosure Project responses – the quality of overall disclosure is still less than satisfactory. ‘Assessments of corporate disclosure practices on climate change show significant improvements in recent years, particularly in voluntary disclosures,’ the report concludes. ‘However, overall disclosure continues to be highly inconsistent and often inadequate, particularly in mandatory filings, and frequently fails to meet the needs of investors.’ Still, the report includes a half-dozen concrete examples of ‘good quality disclosure’ in financial filings by companies such as Chiquita Brands International, Siemens, Rio Tinto, AES and Xcel Energy. It also lists examples of ‘poor’ and ‘weak’ disclosure.”

Clearly some industrial sectors, like agricultural and tourism, have greater exposure to climate-related risks than other sectors. But even sectors that aren’t directly affected by climate change, like electronics, could find themselves impacted when severe weather events disrupt supply chains. The most recent such event was the flooding in Thailand that is likely to cause a significant shortage of harddrives over the coming months. The article continues:

“Following many of the topics outlined in the SEC guidance, the report identifies five key categories of climate disclosure expected from companies, including:

* Regulatory risks and opportunities: Quality disclosure should include specific details and quantification of impacts from proposed or enacted carbon-reducing regulations on a company’s direct and indirect operations, such as impacts in costs or profits from operating power plants, fossil fuel extraction or selling emission credits.

* Physical impacts: Quality disclosure should include detailed information about significant physical effects of climate change, such as increased incidence of severe weather, rising sea levels, reduced arability of farmland and reduced water availability, that may materially affect a company’s operations, competitiveness and bottom-line results.

* Indirect Consequences/Business Trends: Quality disclosure should include a thoughtful and candid discussion of management’s understanding of how climate change may effect its business, whether from new opportunities or risks from decreasing demand for high carbon-intensive products or rising demand for cleaner, more energy-efficient products.

* Greenhouse Gas Emissions: Quality disclosure should set forth current direct and indirect GHG emissions from their operations, methodology used to produce such data, and estimated future direct and indirect emissions from their operations, purchased electricity and product/services.

* Strategic Analysis of Climate Risks and Emissions Management: Quality disclosure should include a strategic assessment that includes a statement of the company’s current position on climate change, an explanation of significant actions being taken to minimize risks and seize opportunities, and corporate governance actions relating to climate change, such as establishment of any management or board of director committees to address the topic.

I suspect that, when someone hears about corporate risks associated with climate change, government regulations are not the first thing they think about. As the article notes, however, government regulations can have a significant impact on how a company operates as well as its bottom line profits. One good example of this involves how UPS is responding to the European Union’s efforts “reduce carbon-dioxide emissions from the world’s jetliners.” [“UPS Charts Possible EU Flyaround,” by Doug Cameron and Daniel Michaels, Wall Street Journal, 21 December 2011] According to the article, “The U.S. air-cargo giant may reroute flights to cut the cost of the European plan, which will require carriers to buy permits for emissions generated on flights to, from and within the European Union.” The SupplyChainBrain article continues:

“The report also includes an 11-point checklist to help companies to improve the quality of their disclosure and position themselves to respond more effectively. ‘This document will be an important catalyst in the major shift in attitudes towards climate change that is now taking place in the investment industry,’ said Kevin Parker, global head of Deutsche Asset Management. ‘Institutional investors everywhere are recognizing that climate change is a risk they must take full account of in their overall portfolios. As DB Climate Change Advisors demonstrated in its own recent report on this issue, Investing in Climate Change 2011, greater transparency and better information from companies is essential to enable them to assess the risk effectively. Ceres’ report is critical in defining what investors need to know in setting the standard of information companies must aim at.'”

This last point is an important one. Although the report is focused on getting companies to provide better information so that investors can make more informed decisions, it can help companies examine risks associated with climate change that they might have ignored or overlooked until they were negatively impacted by them. The article concludes:

“‘This report from Ceres is an important addition in illuminating not only what to report, but insight into the quality of corporate reporting of the risks and opportunities of climate change,’ said Julie Gorte, senior vice president for sustainable investing at Pax World Management, a sustainable investing firm. ‘Five years ago, it was unusual for any company to mention climate change in a financial filing, and few provided much more than a boilerplate acknowledgment that regulation of greenhouse gas emissions might at some point have a material impact on the company. Now, with expanded investor awareness of the financial impacts of climate change, investors are looking for more, and this report gives companies critical information on what “more” should look like.'”

Supply Chain Standard reports, “Over half of global supply chains were disrupted by bad weather [in 2011], according to a survey of over 500 multinational companies sponsored by DHL Supply Chain.” [“51pc of supply chains disrupted by weather,” 12 December 2011] These disruptions are not only aggravating they are costly. The article reports, “49 per cent of businesses reported a loss of productivity from such disruption, while the cost of business was raised for 38 per cent, and 32 per cent lost revenue.” If your company hasn’t started assessing the risks associated with climate change, perhaps that is a New Year resolution worth considering.