Extreme weather drives raw material supply disruptions
The tangible impacts of climate-related weather events are affecting overall costs.
Extreme weather is driving up raw material costs, posing risks to resource-dependent businesses. A Deloitte report shows supply chain disruptions and rising insurance premiums have made climate change a top concern for executives.
Kamal Seth, Director of Climate & Sustainability at WWF-Singapore, underscored the financial impact of these disruptions.
“In 2022, the cost of natural disasters economically was US$275 billion, out of which US$125 billion was not even insured,” said Seth. “We are living in a world in which the frequency of natural disasters is increasing, putting a lot of pressure on companies operating in vulnerable environments.”
He noted that businesses dependent on agricultural and seafood supplies are particularly exposed. “The cost of procuring raw materials is going up because of extreme weather conditions for businesses which are mostly dependent on natural resources. Think of agri-food or seafood, and the companies that supply seafood around the world; they are very vulnerable,” Seth said.
Professor Lawrence Loh from the Department of Strategy and Policy at NUS Business School explained that climate change disrupts supply chains by affecting logistics and distribution.
“If you look at businesses, climate change might affect anywhere in their value chain, including supply chains and customer chains,” said Professor Loh. “Specifically, logistics and distribution are among the most exposed. Changes in climate or extreme weather conditions can disrupt the flow of materials to organizations.”
Seth provided specific examples of industries facing heightened risks. “Think of coffee, cacao, palm, rubber, pulp and paper, and timber. All these natural resources that become raw materials for these companies might be disrupted because of extreme weather conditions,” he said.
In addition to supply chain interruptions, the rising cost of raw materials is further driven by uncertainties surrounding insurance coverage and capital access.
“The cost of insurance is going up because of uncertainties on the assets that need to be insured,” Seth said. “Higher costs of raising capital are also an issue, as financial institutions find it difficult to provide green finance products in this uncertain environment.”
Regulatory developments are compounding these challenges. Seth pointed out that measures such as Singapore’s carbon tax and the EU’s Carbon Border Adjustment Mechanism are likely to increase procurement costs for resource-dependent industries.
