Indirect climate risks cause direct financial costs, modelling finds

Complex supply chains expose companies to climate change risks beyond their own operations, causing material impacts on financial performance, modelling by Oxford Economics has found.

“The market is aware of climate change risks and is gradually getting better at assessing them,” Oxford Economics said in a March research briefing.

“We propose that currently the biggest blind spot in climate risk analysis for the finance sector is in indirect climate risk hidden in supply chains.”

In its study, Oxford Economics modelled stock performance between 2014 and 2024, rating their climate risk based on exposure to certain countries and sectors.

Those exposed to less climate risk throughout their supply chains had measurably better financial performance, the economic advisory firm found.

The results implied that indirect climate risks companies face throughout their supply chains have material implications for financial performance.

Oxford Economics predicted that companies with better climate risk management strategies and less exposure to risk would see benefits in attracting capital as financial markets become more aware of the physical risks of climate change and account for its financial impacts.

“Firms and sectors that are particularly exposed will need to take action to mitigate that exposure, or face restricted access to capital,” Oxford Economics said.

“Those that are more insulated or that actively address their exposure to climate change will attract more favourable access to capital.”

As the study was based on historical market data, its findings may not apply to a future with more frequent and severe climate events.

Economists have noted that climate change is set to cause unprecedented climate impacts, which would go beyond historical climate impacts as the likelihood of multiple climate shocks occurring simultaneously across the world increases.

“The problem of severe climate change in the future is that it's going to be a global weather shock,” climate change economist Dr Timothy Neal said.

“That is when you could have major supply chain disruption.”

Oxford Economics’ modelling indicated that climate change risks have already had material impacts on companies’ value, underscoring the importance of mitigation and risk management throughout a company’s broader supply chain.

“That large-scale climate-related disruptions will continue to occur is both inevitable and foreseeable. However, their expected effect on supply chains is measurable, at least in broad terms. This implies that proactive management can, to an extent, mitigate these disruptions,” Oxford Economics said.