Climate change: the impact on global trade
February 7, 2023
The Covid-19 pandemic sent shockwaves across global supply chains, with 30% of businesses in manufacturing, wholesale, and retail trade reporting disruption. With the obvious problems that this caused, many businesses were forced to adapt and digitalise, bringing traditionally paper-based processes into the virtual world. But a longer-term issue looms: climate change.
Supply chains, and global commerce more generally, play a major role in the emission of greenhouse gases. Yet, in turn, these supply chains are particularly vulnerable to the impacts of the climate crisis, when considering the disruptions to trade caused by extreme weather.
Many banks, including those that we work alongside, are becoming progressively more concerned about risk in trade finance, considering the issues that may arise because of climate change. However, there is also much to be gained on the investment side by prioritising climate awareness, for institutions and their trade finance clients. In 2020, 85% of investors considered environmental, social and governance (ESG) when making investment decisions.
Banks must rise above the noise to offer incentives to borrowers along supply chains, ensuring that such policies are well-communicated; the support of a specialist PR agency can be invaluable here in positioning experts in both trade finance and ESG more generally. Amplifying the voices of specialists in these fields also benefits the wider industry, which is suffering from a lack of standardisation and cohesion in ESG standards and reporting. Driving these conversations contributes to tangible change, allowing financial institutions to better step up to their vital role in addressing the climate crisis. And, with investors increasingly aware of the ‘greenwashing’ phenomenon, this is now more important than ever.
Supply chains as a contributor to climate change
According to a report by consulting agency McKinsey, supply chain operations account for more than 80% of a consumer company’s greenhouse gas emissions. The transportation of goods, predominantly by boat contributes to supply chain emissions. Large cargo ships, powered by up to 66 gallons of fossil fuels per minute, mean that shipping alone is responsible for 3% of global emissions. These ships also use a far cheaper, sludge-like fuel, called heavy fuel oil, that releases toxic chemicals when burned.
Using more energy efficient transportation methods, more sustainable fuel alternatives, and reducing waste along supply chains can collectively reduce the carbon footprint and environmental impact of operations from global trade.
Climate change is already a reality
Although the risks associated with a warming planet are well known, they are no longer a problem for the future but the reality of today. Climate change is already affecting key industries worldwide, with potentially devastating consequences.
Whether this is because of wildfires, flooding, or drought, supplies of lumber – and some food items – are already being impacted. Disruptions are affecting every stage of the production process. For example, in the agriculture industry, climate-related adverse weather events are affecting the production of rice in China, and chocolate in South America. Issues in vital supply chains such as these will continue to put increasing pressure on those already facing food insecurity.
Within the rare earth mining industry, sourcing metals crucial to the production of technology such as mobile phones and computers, climate change is also causing problems. In coming years, extreme rainfall (defined as more than 170 millimetres per day) will occur twice as often by 2030, leading to a 20% drop in certain rare earth mines output, due to increased landslide and flood risk.
Emerging markets disproportionately affected
Recently, discussions around the impacts of climate change have centred on emerging markets, particularly in the Global South. These regions are already experiencing record-breaking droughts and flooding, alongside hurricanes and other extreme weather events. For example, recent flooding in Pakistan caused an estimated $16 billion+ of damage and led to the tragic deaths of over 1,700 people. At last year’s COP27 climate summit, it was decided that wealthier countries, such as those in Europe and the US, will begin to contribute to a specific fund to support those negatively impacted by climate change in less developed economies. It is widely agreed that more developed countries, who have historically relied on hydrocarbons to fuel decades of industrialisation, are overwhelmingly responsible for the emissions of greenhouse gases. The difference here is stark; the entire continent of Africa accounted for just 3.8% of global emissions in 2019, compared to the US, which accounted for 19%.
Beyond the human impact, emerging markets also tend to be more responsible for agriculture and the production of other primary goods, making them vulnerable to longer term issues with farming and mining processes.
Impact beyond emerging markets
But emerging markets are not experiencing the effects of climate change in isolation. Global supply chains are vulnerable to issues at any stage of production, meaning that these issues have knock-on effects for secondary producers, transporters, and ultimately, consumers.
Speaking to US broadcaster PBS, maritime infrastructure resilience scholar Austin Becker, of the University of Rhode Island, warned: “Every coastal community, every coastal transportation network is going to face some risks from [climate change], and we’re not going to have nearly enough resources to make all the investments that are required.”
In part, this is because the disruption to transport and shipping as well as production resulting from climate change will only intensify.
In the US, wildfires are increasing in length, frequency, and severity. For example, 12 of the 20 largest wildfires ever recorded in the state of California have occurred since 2015. In part, the growth in frequency and intensity of wildfires in the US has been attributed to warmer springs, longer summers, and drier vegetation due to droughts. As a result of these wildfires, railroads and trucking routes were closed for extended periods, affecting the delivery of goods to consumers and businesses across North America.
In addition, droughts in China have led to record low water levels in the Yangtze River, a core artery for trade within the county, meaning that ships carrying goods could not reach ports. As companies attempted to move their goods using trucks and trains, the ramifications to the global markets only grew, with product delays causing losses for many companies. Production in the region was also affected more widely: decreased hydropower output caused blackouts in key manufacturing centres, and affected factories belonging to companies such as Volkswagen, Toyota, and Foxconn.
With 90% of global trade occurring via ocean shipping, hurricanes and other extreme weather pose a significant threat to the delivery of goods. The semiconductor industry, central to computing and technology, is particularly vulnerable to the impact of climate change and other global market shocks. In fact, in recent years, there have been widespread shortages in semiconductor chips, as the pandemic and other issues led to bottlenecks in manufacturing.
Manufacturing semiconductors is a complex – and lengthy – process. Thus, the supply chain is particularly vulnerable to global shocks, which have long-lasting and wide-reaching effects. And, for semiconductor manufacturing, extreme weather has already caused global disruptions: in 2021, an intense winter storm in Texas caused power outages that completely shuttered production at a number of factories. For some of the manufacturers affected, like Samsung and NXP, this represented up to 30% of their global output.
Furthermore, the semiconductor supply chain relies heavily on manufacturing centres found in geographies such as Korea, Japan, Taiwan and other parts of the Western Pacific. This region is particularly affected by hurricanes, but, by 2040, it is predicted that the probability of a hurricane of sufficient intensity to cut off or delay supply chains may grow between two and four times. These disruptions, whether that is damage to facilities and equipment, or weather preventing the movement of shipments, could last up to several months. In such a delicate supply chain, these disruptions may prove disastrous for meeting global demand.
More generally, key shipping routes are now at risk of climate-related damage. The Suez Canal, through which $1 trillion worth of goods passes annually, and the Panama Canal, responsible for the transportation of $270 billion worth of goods per year, are both at increased risk of rising sea levels and coastal inundation. Increasingly unpredictable winds, sandstorms and changing ocean salinity and density are also affecting boats themselves, which are not adequately engineered for such changes. Investments must be made to increase ship adaptability, should disruptions become inevitable.
The role of finance in creating a sustainable future
In recent years, a number of green financing instruments have been developed to encourage suppliers and traders to adhere to climate-conscious guidelines. One such set of guidelines is the European Union’s Non-Financial Reporting Directive (NFRD), which states that large companies must disclose information on their operations in relation to social and environmental challenges. The NFRD sets out the disclosure rules on environmental matters, social matters and treatment of employees, human rights, anti-corruption and bribery, and diversity on company boards.
These guidelines can then be used to determine eligibility for green financing instruments. Green bonds and loans, for example, come with requirements for environmentally friendly projects, but also offer beneficial rates and other incentives for borrowers. Sustainable supply chain finance programmes are also growing in prominence, enabling large corporates to directly incentivise their suppliers to improve their ESG impact by offering favourable financing rates for those that perform well on pre-agreed metrics.
As more financial institutions offer these instruments, borrowers will be increasingly motivated to centre sustainability in their operations. The industry is currently at a key moment, as efforts to standardise ESG metrics begin to take seed. The NFRD, for example, has set the EU on a clear course towards greater business transparency and accountability on social and environmental issues. Creating such a set of standardised metrics will be critical in the coming years to develop a robust system that investors can rely on when considering ESG in their portfolios. Furthermore, creating a transparent and stable system will promote better ESG standards in general, as corporates and banks have a better idea of their goals and objectives. This also prevents greenwashing in the industry, as figures and standards cannot be doctored to provide favourable outcomes for sustainable financing instruments without prompting tangible changes.
Fortunately, green solutions are now increasingly scalable. Most companies now understand the impact of their emissions and are moving to reduce them, by using renewable energy, reducing waste, and implementing circularity where possible. For instance, Honeywell now provides a solution to lower the emissions associated with traditional plastic recycling, with their UpCycle technology expected to reduce CO2-equivalent (CO2e) emissions by more than 50% compared with the same amount of virgin plastic produced from fossil plastic feeds. With multinational corporates now beginning to set the precedent on reducing emissions, it is hopeful that other supply chain participants, supported by technological developments in fuel and transport, will now follow suit.
As a major emitter of greenhouse gases, and with a lot to lose from heightened climate risk, global supply chains must now fight to save themselves. And, with investors keenly aware of greenwashing, it is key that financial institutions communicate their genuine commitment to supporting this transition, even as ESG reporting continues to suffer from a lack of cohesion and standardisation.
For specialist PR agencies supporting these financial institutions, understanding the nuances of ESG and the conversations around climate change is crucial to ensuring that clients’ genuine commitments to change are heard, and that the voices of their experts cut through the noise.
Find out about FINN Partners’ work in this area, take a look at our Financial Services practice.
TAGS: Sustainability & ESG