Across many regions around the world, extreme weather events and chronic physical climate risks are worsening. In 2024, global economic losses reached a staggering $320 billion, up from an inflation-adjusted $268 billion in 2023. This year shows no signs of the exposure to physical climate risks abating, signalling the urgent need for companies to accurately assess their vulnerability to operational and financial risks posed by worsening climate hazards. 

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According to new research by S&P’s Sustainability Insights team, however, many companies may be underestimating their exposures to physical climate risks if they fail to consider value-chain exposures in their risk analyses. With S&P’s experts predicting that up to 4.4% of the world’s GDP could be lost annually if global warming does not stay well below 2C by 2050, it’s important for companies to begin to understand not only their direct exposure to physical climate risks, but also their indirect exposure via their value chains.  

Understanding value chains amidst global climate disruptions 

Where a company’s supply chain typically refers to the chain of suppliers inputting to a final product, value chains refer to the full series of activities required to create, deliver, and support a company’s product or service – from research and development to customer support. 

As such, an organisation’s exposure to physical climate risks is not isolated to its own assets and operations. Impacts from climate hazards on individual companies can be substantial and compounded through value chains. This is despite such hazards often being temporary in nature and sometimes limited to specific sectors or geographies. 

For example, in 2024, heavy flooding in the state of Rio Grande do Sul in Brazil created significant disruptions within various supply chains. Damage sustained to roads, airports, and seaports affected the value chains of agricultural commodities that are integral to Brazil’s economy, including soybeans, wheat, auto parts, and most notably, tobacco. With Rio Grande do Sul exporting over 93% of Brazil’s total tobacco in the 12-months leading up to the flood, the climate hazard’s toll was deeply felt as operations halted for several days. 

Not only did this create losses to inventories, production volumes, and sales, but high inflationary pressures and logistics bottlenecks continued to persist in the medium term. In addition, some operations of the companies affected were permanently damaged, demonstrating the long-lasting impacts of climate hazards to a company’s value chain. 

How S&P’s research can improve companies’ overview of value chain risks 

While physical climate risks are consistently looming and threaten companies’ value chains, many companies have not yet mobilised to action change.  Only about one-fifth of companies have adaptation plans and less than half plan to implement their adaption plans within the next decade. Second to that, supply chain management is also not widely considered a top material issue, as only 6.5% of companies chose supply chain management as a top material issue.

With climate hazards worsening and some companies only making limited progress on adapting to these risks, they could be exposed to a reduced reliability of their value chains. This is exacerbated for companies and sectors that are more sensitive to the physical impacts of climate change, such as the agricultural sector. 

As such, seeking to enhance the understanding of sectors’ exposures to physical climate risk by looking beyond just direct exposures remains a priority for S&P. S&P’s research uses economic input-output data from the U.S. Bureau of Economic Analysis (BEA) to first build value-chain models at the sector level to showcase the economic inputs and dependencies between sectors. These value-chain models then dig into the direct exposures of different sectors to nine climate hazards, which allows researchers to estimate the exposures to physical climate risks that each sector inherits from the sectors in its own value chain. 

By focusing on the potential impacts, or risks, to sectors downstream of the climate hazard event, rather than potential opportunities, S&P’s research augments understanding of how climate hazards might transmit through value chains and lead to potentially material credit impacts. 

From agriculture to real estate: a look at sector exposures to rising physical climate risks 

To illustrate the magnitude of risks due to physical climate hazards, 29 sectors were analysed to support S&P’s research, all of which inherited at least some physical climate risk from their value chains. All 29 sectors are expected to have a moderate direct exposure to climate hazards by 2030. 

The five sectors most directly exposed to nine physical climate risks – which includes extreme heat, extreme cold, wildfire, drought, water stress, coastal flooding, fluvial flooding, pluvial flooding, and storms – are agribusiness, forest and paper products, consumer (food), chemicals, and building materials. By the 2050s, sectors with the greatest increase in direct exposure include oil and gas, real estate, utilities, and midstream energy. 

Some sectors with complex and long value chains fall below the direct exposure score, however, the impacts from physical climate risks can still be significant when considering the scope for indirect exposure. For example, the retailing (nonfood) sector may rely on apparel companies in the consumer (nonfood) sector whose own suppliers rely on materials such as textiles, metals, plastics, and wood. In the event of worsening climate hazards, the sector could be more indirectly exposed as agricultural outputs, such as cotton, are affected. In this event, risks may spread to sectors linked to the agricultural value chain, making it important for business to understand the full extent of sectoral exposure to physical climate risks by having an overview on these value-chain exposures.

According to S&P’s research, all sectors will see a rise of more than 8% in value-chain exposures to climate hazards by the 2050s if adaptation plans are not set in place. However, S&P’s research indicates there is some way to go for businesses to assess and manage risks from both direct and indirect exposure. For example, despite S&P’s value-chain model ranking the consumer (food) industry as one of the most exposed to climate hazards, only a little over 20% of companies in the food, beverage, and tobacco industry considered supply-chain management as a top issue. 

The big picture

Looking ahead, the adaptation and resilience interventions required by companies will vary. They will depend on where the companies’ assets are located and the sensitivity of those assets to climate hazards. As one example, companies with operations that are water intensive are likely to be more sensitive to constrained water supply or increased water costs. Similarly, extreme heat events reduce labour productivity more when work is conducted outdoors – as is the case within the agriculture industry – due to heat stress, compared to when activity is indoors, such as in the services sectors. 

Moving forward, companies must proactively monitor adaptation and resilience plans for potential disruptions to effectively and quickly respond to manage the potential devastating impacts of climate shocks. Those companies with robust adaptation plans that consider value chains exposures are more likely to be better placed to navigate the threats of worsening climate hazards.