Assessment of Physical Climate Risk in the Supply Chain
Enabling a global pharmaceutical leader to assess and mitigate climate-related risks
The pharmaceutical sector is exposed to climate-related
disruptions to its own operations as well as within the broader supply chain. Understanding climate risk exposure is a first step towards making pharmaceutical companies more climate-resilient in an uncertain future.
The pharmaceutical sector has a highly specialised supply chain with low ability to substitute alternative components or suppliers, and suppliers often have constrained production capacity. This makes the sector particularly vulnerable to climate-related risks. Our client is no exception which is why they applied Oxford Economics’ Sustainability Management Advisory Platform (S-MAP), to assess physical climate risks within their supply chain.
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Read MoreThe Challenge
Our client is one of the world’s largest pharmaceutical companies, with a global supply chain spanning across numerous sectors and countries. While our client had started to explore climate-related risks to its own operations in its most recent Task Force on Climate-related Financial Disclosures (TCFD) report, the primary challenge was understanding climate risk exposure via the supply chain.
Clients face various challenges in doing this, such as data availability and understanding whole economy trade linkages. Crucially, our client wanted to evolve its climate risk assessment by considering its economic exposure to risk via supply chain disruptions, not just the risk from direct physical impact.
The Solution
For our client, Oxford Economics’ Sustainability Management Advisory Platform (S-MAP), met this challenge. It provided the framework to assess climate and sustainability risks it faces in its business activities and supply chains.
The analysis was three-fold and involved:
- Materiality Assessment: Assessing the exposure to physical climate risk from the company’s first-tier suppliers;
- Economic exposure to risk for material suppliers: Assessing economic exposure to climate risk via localised economic disruption from climate-related hazards;
- Indirect risk in the company’s upstream supply chain: Understanding indirect climate risk exposure via the company’s entire extended supply chain, identifying material second-tier suppliers.
The materiality assessment was informed by the European Financial Reporting Advisory Group (EFRAG)’s Implementation Guidance, which is regarded as best practice. A simplified version of the steps taken are illustrated below.
High-level approach adopted for materiality assessment
This analysis utilised our proprietary direct and indirect climate risk scores:
- Direct risk scores capture the climate risk exposure of a company’s suppliers.
- Indirect risk scores capture the risk to a company’s entire upstream supply chain. In other words, the climate risk exposure of not only a company’s suppliers, but its suppliers’ suppliers and so on, based on modelled trade linkages across the economy.
Illustration of a company’s direct and indirect climate risk scores
We also applied our economic exposure scores which are calculated for each NUTS3 region and sector for hazards across Europe. These scores capture economic exposure of the company and supplier facilities that could be affected by a physical hazard. For example, the map below highlights the key assets in the NUTS3 Rome region which are exposed to local economic disruptions.
Key physical assets and transport links in the NUTS3 Rome region
The Result
These results helped the client to identify its most at-risk suppliers. The outputs of the project were also used to inform the client’s sustainability reporting initiatives, such as the TCFD and CSRD. The client can further leverage these results to:
- Identify sectors and products which have high dependence on physical assets and/or low availability of alternative suppliers. This information can help the client consider diversification further downstream at the product level.
- Use evidence to engage with material suppliers identified in this analysis.
- Apply our tools to forecast how the climate risk profile will change over time and use scenario analysis to explore the effect of strategies to mitigate or avoid exposure to climate risk in the supply chain.