Climate and environmental change will fundamentally shape the global economy and business practices in the coming decades. These climate-driven, economic shifts will arise from the actions governments and businesses take to address the risks of a warming climate, including transition risks. As their exposure increases, so will the attention given to supply chains as companies strengthen their mitigation and adaptation efforts, to reduce both their impact and their exposure to climate risks.
However, misguided actions to reduce climate risks, known as maladaptation, could adversely affect workers, local enterprises, and communities, who are vital to both local and international supply chains. That’s why it is important to integrate environmental, economic, and social governance of the supply chains into long-term risk management strategies. This can create more resilient and better-positioned supply chains, that will be able to manage the climate risks and impacts businesses will face to advance a just transition to net-zero and environmentally sustainable economies.
The concept of just transition has increasingly gained traction among large companies looking to accelerate the adoption of environmentally and socially responsible business. At the same time, newly adopted regulations have recently imposed new requirements for companies to tackle issues related to climate change, labour, and human rights. The effects of these new regulations on supply chains have not gone unnoticed.
A just transition
Companies are aligning themselves with a net-zero and climate-resilient economy, but this shift should not forget to implement a just transition. A just transition means promoting environmentally sustainable economies in a way that is as fair and inclusive as possible to everyone concerned, creating decent work opportunities, and leaving no one behind. This entails that companies include principles of social dialogue, labour rights and decent employment into climate risk management strategies and share the benefits of business with workers and communities.
Affected stakeholders should also be taken into account, to ensure proper management of the impact engaging with affected communities is essential. An open and transparent dialogue, including different and diverse perspectives, focusing on trust and addressing the needs and aspirations of different stakeholders, should be the main way of engaging those affected and ensuring a just transition.
Companies can manage the convergence of different climate risks that they are exposed to through their supply chains by ensuring a just transition. The idea shall be at the center of their transition planning and risk management strategies and should be a key pillar of overall business management. On the same point, other factors such as the role of governments and multi-stakeholder collaborations and the importance of multilateral frameworks, play a pivotal role in inserting the idea of a just transition into business practices, and shall never be omitted.
Business and supply chain challenges
Businesses are exposed to myriad challenges related to climate change. Many companies have begun to recognise that climate change poses a strategic and operational risk that will have a material impact on their business operations. Some of the key climate risks include the physical impacts of climate change, such as heatwaves or rising sea levels; transition risks related to the shifts towards a low carbon economy, and finally the adverse consequences from adaptation outcomes, discussed earlier and often called “maladaptation”.
Supply chains, specifically the complex systems and processes where raw materials and components are transformed into a finished product or service, are arranged across different tiers that relate to the distance between the supplier and the final product. Value chain emissions are on average 11.4 times higher than companies’ operational emissions, and 76 percent of business leaders have reported moderate to very high pressures from investors to advance on supply chain sustainability.
The actions taken by businesses to advance the transition often require them to seek new inputs to supply chains, technologies, and skills, which can result in unexpected labour and social risks. This includes impacts on employment across different sectors and issues such as child labour, hazardous working conditions and adverse impacts on communities, including Indigenous communities.
Supply chains are also increasingly being affected by climate change through changing weather patterns and extreme weather events such as storms, floods, droughts, and wildfires. Climate impacts are causing more frequent and severe disruptions to supply chains by reducing the availability of natural resources, damaging infrastructure, and disrupting logistical routes. They also affect workers’ and communities’ health, safety, and livelihoods of workers and communities.
To ensure a just transition, it is essential for risk management strategies to incorporate social and environmental risks into their mitigation and adaptation measures for their supply chain.
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