Editor's Note:
This commentary is an executive summary of "Sustainability Insights Research: Ripple Effect: How Value Chains Compound Sector Exposures To Physical Climate Risks," published March 13, 2025. Please click here to read the full report on spglobal.com/ratings/SustainabilityInsights.
This report does not constitute a rating action.
Key Takeaways
- Companies may be underestimating their exposures to physical climate risks if they fail to consider value-chain exposures in their risk analyses. In turn, they may also be underestimating potential operational and financial impacts.
- All sectors inherit at least some physical climate risk exposures from their value chains, including those with relatively limited direct risk exposure - but most exposed are those that rely on climate sensitive upstream sectors.
- Whether physical climate risks embedded in value chains have material credit impacts depends on many issuer specificities.
Extreme weather events and chronic physical climate risks are worsening in many regions. Globally, economic losses reached $320 billion in 2024, up from an inflation-adjusted $268 billion in 2023, according to Munich Re, a global reinsurance company.
But risk isn't isolated to an entity's own assets and operations. An entity or a sector's exposure to physical climate risks includes not only its direct exposure but also indirect exposure via its value chain.
Whether due to commodity shortages, geopolitical tensions, logistical bottlenecks, or other causes, disruptions that originate in the value chain can reverberate outward. This can have meaningful operational and/or financial impacts on downstream sectors that depend on the inputs of critical goods and services.
Few Companies Appear To Have Adaptation Plans
Exposure reaches all industries
- Based on analysis of the S&P Global Sustainable1 Physical Climate Risk dataset, and under a slow transition climate scenario (SSP3-7.0), absent adaptation, all sectors face at least moderate direct exposure to physical climate risks, where the projected average sensitivity-weighted composite score this decade is between 30 to 69 out of 100.
- Nevertheless, only about a fifth (21%) of companies have an adaptation plan in place to address these direct physical climate hazards (see below).
How risk flows through sectors
- Sectors are not only exposed to physical climate risks through their own assets and operations.
- We estimate the exposures of sectors to physical climate risks in their value chains by examining the upstream sectors on which they rely and weight the inherited risk by the percent value that one sector contributes to another sector's output.
- All sectors inherit at least some physical climate risk exposure from their value chains.
- However, the magnitude of a sector's value-chain exposures to physical climate risks depends on: (a) how much it relies on other sectors, and (b) the sensitivity of these sectors to worsening climate hazards.
Industries face two types of exposure
- Sectors are exposed to climate hazards both in their direct operations and through their value chains.
- The consumer (food), agribusiness, autos, and chemicals sectors are among the most exposed sectors when considering both direct and value-chain exposures.
- Some sectors with relatively lower direct exposures may nevertheless have meaningful value-chain exposures.
- Airline companies, for instance, are themselves not considered highly exposed to climate hazards. However, they rely heavily on airport operators and other entities in the transportation infrastructure sector, and thus, may be more greatly exposed to both acute and chronic climate hazards through these value chain linkages.
How Industry Exposures Lead To Value-Chain Exposures
For the auto sector, more than half of exposure comes from other industries
- This analysis enables us to look at the source of physical climate risks that are inherited by a sector from its value chain.
- In this example of the autos sector, 44% of value chain physical climate exposures comes from companies within the autos sector (its internal value chain), e.g. auto parts companies supplying auto manufacturers.
- The metals and mining and chemicals sectors also contribute meaningfully to the auto sector's value chain physical risk exposure, at 11.6% and 9.3%, respectively.
Risk can influence financial performance
- S&P Global Ratings takes into consideration disruptions where their materiality and severity could dampen the capacity and willingness of an entity to meet its financial commitments.
- Physical climate hazards are among those risks that could cause material value-chain disruptions. However, the actual financial impact of a physical climate hazard in the value chain will depend on the nature of the impact and unique characteristics of a company.
- Value-chain risks may manifest as financial risks through three key transmission channels: business disruption or downtime, changes in input and production costs, and costs of adaptation and resilience measures
- However, the sensitivity of any one company to these transmission channels will hinge on certain company-specific factors, including: the value chain's geographic concentration, a company's particular supply chain and sourcing model, the substitutability of inputs, among others.
Looking Ahead
More frequent and severe climate hazards are increasingly exposing companies to impacts, touching all sectors in some way--and to varying extents-- without efforts to adapt. Investments in adaptation and resilience may protect companies and countries from climate shocks.
There may be a positive externality--or ripple effect--of the benefit of adaptation and resilience investments. While risks can be transmitted through value chains, so can the benefits of adaptation and resilience. For example, companies with operations in countries that are better adapted to worsening climate hazards are more likely to indirectly benefit from more robust infrastructure. Policies that provide effective support in the face of, or following, climate shocks also can be of benefit. Adaptation in one sector may also contribute to the resilience of one or multiple downstream sectors via value-chain effects.
Understanding companies' value chain exposures to physical climate risks can also help prioritize areas where investments in adaptation and resilience may have the greatest impact on supply chain resilience. By analyzing specific vulnerabilities, investments may be directed toward adaptive solutions, such as infrastructure hardening and supply chain diversification. At the same time, those investments may foster innovation in terms of the technologies, products, or services that are needed to address the threats posed by worsening climate hazards.
Related Research
- Ripple Effect: How Value Chains Compound Sector Exposures To Physical Climate Risks, March 13, 2025
- Risky Business: Companies' Progress On Adapting To Climate Change, April 3, 2024
- Lost GDP: Potential Impacts Of Physical Climate Risks, Nov. 27, 2023
This research report explores an evolving topic relating to sustainability. It reflects research conducted by and contributions from S&P Global Ratings' sustainability research team as well as our credit rating analysts (where listed).
Consistent with our criteria, our credit ratings incorporate the adverse physical effects of climate change--that are sufficiently visible and material--along with all other factors material to our assessment of creditworthiness.
We do this when we believe such impacts could materially influence the creditworthiness of a rated entity or issue and we have sufficient visibility on how they will evolve or manifest.
The findings of this research are currently not part of our base case analysis, given the uncertainties inherent in climate projections.
| Sustainable Finance: | Paul Munday, London + 44 (20) 71760511; paul.munday@spglobal.com |
| Bruce Thomson, New York +1 2124387419; bruce.thomson@spglobal.com |
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