John D. Sterman teaches at the MIT Sloan School of Management. Speaking to Srijana Mitra Das, he discusses climate impacts on supply chains — and mitigations for greater sustainability:
Q. What is the core of your research?
A. I direct the MIT System Dynamics Group and am co-director of the MIT Sloan Sustainability Initiative. My main research centres on policy to address climate change.
Through our interactive climate policy simulation models, we work with senior leaders in government, business, investing, philanthropy, civil society, education and the public at large in the US and worldwide to help people learn for themselves about the harms from climate change and ways to build a more secure and prosperous future.
Q. New insights from you suggest climate change is already impacting supply chains — can you outline this?
A. We’ve already warmed our world over 1°C above pre-industrial levels. The harms from even that are obvious to all now — these include wildfires, drought, crop yield declines, sea level rise, more extreme storms and flooding and the migration and conflict these create. All these disrupt supply chains through interruptions to sourcing, production, transport and destination markets.
Consumers can expect higher prices and much more volatility in the availability of products as climate change increasingly disrupts the production of commodities.
Q. Are finance and service industry supply chains also climate-vulnerable?
A. Yes. Banks and other financial institutions will experience greater default on loans and higher risk. The cost of capital will rise, slowing investment and economic growth, particularly in emerging and developing nations. Financial markets abhor risk and uncertainty — climate change increases both.
Service industries, like healthcare and tourism, will also be affected. IT consulting, accounting and other service businesses will be impacted as climate change disrupts supply chains for electronics and threatens telecommunications infrastructure.
Q. How can companies protect their supply chains from climate impacts?
A. In the short run, companies need robust emergency plans to safeguard against extreme weather. These may include alternative sources of supply and strategic inventory accumulation. ‘Just in time’ works well when material and component supplies are steady and reliable — but this is now a brittle system with low resilience to increased risks of supply disruptions.
These plans should therefore assume more severe disruptions, happening more often and with more weather events hitting at once than actuarial estimates would indicate. Many communities have experienced multiple ‘100-year storms’ in just the last decade — so, historical experience is a poor guide to future risk in a rapidly warming world.
But the most important immediate action for companies and countries is to reduce their greenhouse gas emissions as quickly as possible — without such cuts, global warming will continue, threatening our prosperity and security. The world’s poor will not be able to rise out of poverty. Instability will increase and the harm to businesses and people will be profound. There is no time to waste.
Furthermore, companies that cut their dependence on fossil fuels by investing in efficiency and renewable energy increase their own resilience — they will be less vulnerable to disruptions in energy supply and wild swings in energy prices due to the physical harms from climate change and transition risks as governments impose policies that will raise costs and reduce the availability of coal, oil and methane gas.
Finally, companies must not only work to cut their own emissions and those of their supply chain partners, they must demand that governments enact policies to phase out fossil fuels as swiftly as possible and promote renewable energy.
To succeed in a warming world , businesses need reliable, renewable, responsible sources of zero-carbon energy. Government policy is essential in providing this infrastructure that will reduce business risk and uncertainty, fostering sustainable development and a healthy business sector.
Q. Have companies already begun applying climate mitigation strategies?
A. Apple, Amazon, Microsoft, Walmart, General Motors and many other global leaders in business have committed to achieve net zero emissions by midcentury or even sooner.
The real estate industry has discovered that highly efficient green buildings have lower operating costs — these cost only 0-5% more than conventional buildings, are more comfortable, boost worker productivity and are more resilient to climate-fuelled storms. That’s why green buildings rent and sell at premia compared to traditional buildings.
Q. How do the climate change simulations you’ve devised help companies understand the situation before them?
A. With our partner, the non-profit think tank, Climate Interactive, we have developed interactive simulations of the energy system, economy and climate. The En-ROADS simulation enables you to learn for yourself about the climate and energy system. You can try any actions and policies you like and discover which can help limit climate change and which are low-leverage or too little, too late.
Elected officials, senior company leaders and civil society representatives are using En-ROADS to learn how they can help create a more sustainable world. Try it yourself at http://en-roads.org
Views expressed are personal