Building a climate change resilient supply chain: The time is now

Climate change will present ongoing challenges for global supply chains in the future, even as pandemic-related bottlenecks ease. It promises more unpredictable natural disasters which have potentially catastrophic consequences on global supply chains.

The Task Force on Climate-related Financial Disclosures (TCFD), created in 2015 by Switzerland’s Financial Stability Board (FSB) has developed a framework for companies to disclose investor grade climate-related financial information.

Several jurisdictions including the U.K., Japan and Singapore, have already passed legislation that enforces the TCFD recommendations.  So far, such legislation requires  mandatory climate-related disclosures for certain listed companies.

In Singapore, every listed company is now required to prepare annual sustainability reports which need to be based on nearly 30 core Environmental, Social and Governance (ESG) metrics. These metrics include greenhouse gas emissions, energy consumption, water consumption and waste generation. A Singapore listed company will need to disclose the company’s sustainability practices on a “comply or explain” basis.

All listed companies must also provide climate reporting based on the TCFD recommendation in their sustainability report from FY2022.  Climate reporting will be mandatory for listed company for certain industry from FY 2023 and FY 2024.  Listed company must also maintain a board diversity policy that addresses gender, skills and experience, and other relevant aspects of diversity.

It is extremely important for companies to leverage contractual remedies for ESG non-compliance. One way to ensure that such representations are accurate and legally binding is to include them as part of the written representations and warranties in a contract. A company may need to negotiate for an indemnity from the supplier for any third party actions related to inaccurate representations. These contractual provisions would allow a company to be able to bring legal action for misrepresentation or breach of contract.

Aside from regulatory compliance, companies will need to consider their own climate change risks in the supply chain and how to mitigate those risks. Measures they can take include:

  1. Consider suppliers and their expansive networks– Conducting due diligence on suppliers before they are engaged is a critical step in ensuring ESG standards are upheld in an organisation’s procurement process. There is also a need for supply chain diversification so that, in an event of a natural disaster, companies can quickly pivot to alternative sources.
  2. Mapping out supply chain thoroughly and assessing each site’s risks – Identifying sites across the world that support manufacturing, warehousing, distribution, and repair by land, sea, and air. Assessing the costs, risks, delivery times, and carbon footprints of each. Examining the vulnerabilities of each site, these can include geopolitical risk factors, access to stable energy sources and availability of natural resources
  3. Conduct simulations – This will help companies develop best practices and procedures and optimise their supply-chain-networks.

 

It is crucial for companies to consider how climate change can impact product lines and supply relationships at the time of contracting.  Companies looking to mitigate climate change risks in the supply chain should consider including protections in standard contract terms, clearly documenting compliance requirements, suspension and exit rights.

It is important for contracts to ensure the force majeure clause covers unpredictable weather conditions and disruptions that these can cause to the supply chain. “Force majeure,” which is derived from the French term for “superior force,” refers to circumstances outside of a party’s control that prevent a party from performing under the contract. A typical force majeure provision lists a series of events such as weather-related occurrences and fires. Climate change presents a blind spot, however – standard force majeure provisions may not protect suppliers from many of the vast impacts of climate change.

Today, supply chains face major climate-related threats. While that can mean significant risks, it also presents the perfect opportunity for companies to cease the available opportunities in the transition to a sustainable economy. The shift towards sustainability will inevitably reverberate throughout the supply chain and companies need to be prepared for any accompanying risks along the way.

 

For further information, please contact:

Nicola Loh
Partner
JTJB Singapore Office
E: nicolaloh@jtjb.com
T: 6223 3477 / 9170 7925