Climate risk and supply chains: The hidden link investors can't ignore

The floods, the country's worst in half a century, caused widespread disruption to global supply chains by halting production at key manufacturing sites.¹

That natural disaster led to severe shortages of components for electronics and cars, exposing the fragility of geographically concentrated supply networks.

Why it matters now

Now, almost a decade and a half later, many companies still underestimate the vulnerability of their supply chains to physical climate risks. As extreme weather events become more frequent and severe, the weakest links in global supply networks are being exposed, and investors should take note.

While much attention has been paid to how climate change impacts companies' direct operations, the indirect risks, especially those embedded in supply chains, are often overlooked.

Yet, research suggests that these risks can be even more substantial. For example, a study by the European Central Bank reveals that when supply chain effects are considered, economic losses from climate shocks in Europe could be up to 30 times greater than those from direct effects alone.²

How climate risks ripple through supply chains

Several factors can amplify the vulnerability of supply chains to climate-related disruptions:

• High-risk sourcing regions

  Many companies rely on suppliers in areas prone to climate extremes, from flood-prone Bangladesh to drought-hit Sub-Saharan Africa and hurricane-exposed Central America.
• Fragile infrastructure

  Key transport routes are increasingly affected by climate events. For example, China's Shanghai and Ningbo ports already lose five days a year to extreme winds - a number that's expected to rise in the years ahead.
• Geographic concentration

  Critical components, such as semiconductors and rare earth materials, are often sourced from a handful of regions. A single disruption can cascade across industries.

Which sectors are most exposed?

Industries with complex global supply chains are particularly at risk. These include materials (metals and chemicals), consumer staples (food and beverage producers), consumer discretionary (auto manufacturers), information technology (hardware and semiconductors), and industrials (machinery, electrical components, and building products).

These sectors are particularly vulnerable because weather shocks can reduce supplier performance, increase costs, and even lead to broken supplier relationships.

Yet, according to S&P Global, the financial information provider, fewer than 10% of the companies it surveyed identify supply chain management as a material climate issue.³ Similarly, only one in five companies surveyed has a climate adaptation plan in place to identify, assess, and respond to the physical risks posed by climate change.⁴

Opportunities in resilience

The flip side? We believe companies that actively manage these risks can gain a competitive edge. Research by Oxford Economics shows that portfolios with lower indirect climate exposure tend to deliver higher annualized returns.⁵ For example, these are some of the supply chain themes that we look for in corporate strategies:

Don't be afraid to ask

To assess how well companies are managing these risks, investors should request access to management teams to ask some hard questions. For example, they should ask them about:

Ideally, companies should have clear answers to all these questions. Those that struggle to answer, provide poor answers, or refuse to answer altogether - then it might be time to develop a plan for further engagement aimed at improvement. If no improvements are made, consider divesting.

Final thoughts

Climate change is reshaping the global economy, and supply chains are on the front lines. As geopolitics, energy security, and technological independence strain global logistics, physical climate risks will only accelerate the push for more resilient, diversified, and even localized supply networks. For investors, this presents both a challenge and an opportunity. Companies that adapt early, by reconfiguring supply chains, diversifying inputs, and upgrading infrastructure, are likely to be better positioned for long-term success. Such strategies not only help mitigate climate risks but also open up compelling investment rewards.

Endnotes 1 "Thailand floods disrupt production and supply chains." BBC News, October 2011. https://www.bbc.com/news/business-15285149. 2 "The globalization of climate change: amplification of climate-related physical risks through input-output linkages." Eurosystem. European Central Bank, May 2024. https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2942~6734242a0b.en.pdf. 3 "Assessing the missing links in sustainable supply chain management." S&P Global, April 2024. https://www.spglobal.com/esg/insights/featured/special-editorial/assessing-the-missing-links-in-sustainable-supply-chain-management. 4 "Risky Business: Companies' Progress On Adapting To Climate Change. Sustainability Insights. S&P Global, April 2024. https://www.spglobal.com/_assets/documents/ratings/research/101595538.pdf. 5 "Indirect climate risk in financial analysis." Research Briefing. Oxford Economics, March 2025. https://www.oxfordeconomics.com/resource/indirect-climate-risk-in-financial-analysis/.

Important information

Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed, and actual events or results may differ materially.

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