Want to understand climate risk? Start by looking in your pocket

Ah, the ubiquitous smartphone. No other device so completely exemplifies our dependence on technology. But what if climate change puts the availability of smartphones at risk? You’ve surely noticed the increase in severe climate events in recent years—fire, floods, drought, and storms are threatening your company’s people and disrupting operations. Indeed, more and more organizations recognize the dangers of the events themselves, though relatively few companies understand the implications across their value chain, or know what to do about them.

None of this is to pick on smartphone makers—every company faces disruption from physical climate risk. The 2022 Global Risks Report from the World Economic Forum found that global business leaders considered “extreme weather” to be the most likely risk to become a critical global threat over the next two years.⁽¹⁾ Nonetheless, just 40% of CEOs across industries say they have factored climate change into their risk-management strategies.

To highlight the range of physical climate risks that companies face, and to seek solutions, we conducted a thought experiment that would help us understand how physical risk might affect the manufacture and supply of an indispensable product. PwC researchers mapped the value chain of a typical smartphone and used it to create a simplified, composite view of the physical climate risks involved at each step. Taking a closer look at where our notional smartphone is sourced, produced, shipped, and sold reveals the sorts of challenges that all companies face—and suggests a path to address them.

Two important notes: first, although our smartphone example is imaginary in the sense that it doesn’t depict the operations of any one company, all the locations we describe are real places where these activities occur. The place-names of some sites have been generalized to ensure the anonymity of individual companies.

Second, our smartphone example focuses primarily on physical climate risk and the need to adapt to climate change, and not the many worthwhile actions that companies can—and should—take to mitigate climate change. Those actions are vital, too, but are not the focus of this article.

Where complexity meets risk

Today’s global supply chains are case studies in complexity, and companies may have hundreds, thousands, or even tens of thousands of suppliers depending on their industry. Our archetypal smartphone value chain is highly simplified, consisting of 31 sites across 11 countries and territories (see figure). Nonetheless, these locations (which cover everything from sourcing to distribution) present a realistic illustration of both the range of sites used by smartphone makers and the susceptibility of such sites to the seven climate hazards we studied: floods, extreme rainfall, extreme wind, high heat, hail and thunderstorms, droughts, and wildfires.⁽²⁾

What we found

At every step along the value chain, we found increased signs of physical climate risk, and particularly so in the four-degree warming scenario outlined by the Intergovernmental Panel on Climate Change (IPCC) in which little or no mitigation action is assumed to be taken. Yet it’s important to note that in both warming scenarios we looked at (two- and four-degree warming, respectively⁽³⁾, the climate perils become more frequent and severe than they are today, and thus threaten the ability of our notional smartphone maker to reliably source, produce, and distribute its product.

The threat ultimately comes from two main sources: the direct effects of the peril itself (for example, the flood that knocks out a manufacturing site) and the substantial second-order effects (the same flood destroys bridges to the manufacturing site and inundates workers’ homes throughout the area). Let’s look at how risk plays out across the smartphone’s value chain.

Raw materials sourcing. The starting point of our value chain is raw materials sourcing, and the gold mine in Australasia. This mine supplies the ore needed to make some of the smartphone’s connectors, pins, and relays. By 2030, under a two-degree warming scenario, the mine workers are likely to be exposed to 262 days per year of excessive heat, defined as a wet-bulb globe temperatures (WBGT)—a widely used measure of heat stress that considers the humidity, wind speed, sun angle, and solar radiation to provide an accurate human perception—of 32 degrees Celsius or more. In the four-degree warming scenario, the mine would experience 353 days of high WBGT a year. This would increase the likelihood of heat-related illness, and potentially raise the mine’s operating costs as it sought new ways to cool the mine and keep workers safe.

Manufacturing and assembly. When it comes to the manufacturing and assembly of our smartphone (the next step in the value chain), the most notable risks were heat and extreme rainfall. Under a four- degree warming scenario, a manufacturing site in Japan faces a 60% increase in days with high WBGT, and one assembly site in Eastern China faces a 26% increase in the number of so-called hundred-year rainfall events each year between 2020 and 2050. Increased flooding poses obvious business risks for this site, but also threatens the people living nearby—indeed, parts of Eastern China have already experienced bouts of deadly flooding in recent years.

Transport. Extreme heat could disrupt the operations of the port in Australasia—a key transport site in our notional value chain. In a four-degree scenario, the port will likely experience 116 high-heat days a year in 2050, a fivefold increase from 2020. Meanwhile, the airport in the Southern US would face a smaller relative increase (28%) but an even larger number of annual high-WBGT days in 2050 (122 days per year). Extreme rainfall and flooding could also threaten the main port in Eastern China. In a four- degree scenario, the port faces a 7% increase in “hundred-year” rainfall events per year between 2020 and 2050.

Warehouse. Drought-fueled wildfires are the most worrying risk for the Sacramento, Calif., warehouse location we studied. According to the US Drought Monitor, 97% of California is already in a state of severe drought today, which increases and intensifies the area’s wildfire season. Further global warming would make things worse. In the immediate vicinity of the warehouse, a four-degree warming scenario translates into a 24% rise in the number of annual wildfires per square kilometer between 2020 and 2050.

Distribution and retailing. Finally, high wind poses a risk to certain distribution and retail sites, including one on Florida’s Gulf Coast. Already in an area at high risk of hurricanes, the site has a 1% chance each year of facing a Category 2 storm (translating to winds of over 96 mph). By 2050, the stakes will likely be higher still—with the same odds each year of encountering the more deadly Category 3 storms, which usually cause extensive damage and serious coastal flooding. The 1% odds implied by the term hundred- year event may seem low, but consider that over a 100-year span, the probability equates to a 63% chance that the event will occur at least once. And of course, increasing wind speeds in an existing storm zone will increase the detrimental impacts to people and businesses throughout the area.

So what?

If you’re thinking that none of the examples of physical climate risk seem significant enough to cause permanent economic damage or value chain disruption to our notional smartphone maker, then you’re probably right—but you’re missing the bigger picture. Remember, the damage from climate perils is global, and rising continually: insured losses from natural catastrophes rose to $111 billion in 2021 (from $90 billion in 2020), continuing a trend of an annual 5–7% rise in losses seen in recent decades. And this is only what’s been insured. By some estimates, three-quarters of the world’s potential losses from natural disasters are underinsured. Every global company is likely to be exposed to these risks somewhere in its value chain.

Moreover, none of the statistics above account for the significant second-order impact of climate perils. Consider recent news reports from China’s Sichuan Province that describe how record drought has hampered production of hydroelectric power. In response, some local governments forced power cuts on local industry in order to prioritize residents’ needs. The affected areas are responsible for about 6% of China’s industrial output (a figure that includes smartphone suppliers in the region).

Act now

Although physical climate risks are daunting, their very specificity gives business leaders a tangible starting place. There is nothing theoretical or academic about a flooded production site or a warehouse destroyed by wildfires. Your starting point, therefore, is to understand the physical locations along your value chain that are susceptible to threats, including offices or other places where your employees would be affected. Where are the potential bottlenecks? Remember: the second-order effects of climate perils are disruptive, too. For example, if a vital facility is safe from flooding, but its surrounding infrastructure and transport links aren’t, then the facility will be closed anyway when the waters rise.

Next, overlay the climate hazards at those locations using science-based climate scenarios to see what problems might arise. Carefully consider the hazard’s relevance to the business—and even parts of the business—to avoid surprises. A global industrial equipment maker learned this lesson when it had to redesign a flagship product and retrofit its installed base. The reason? The product would otherwise malfunction in areas where climate change is making conditions wetter.

As this example suggests, some aspects of the business may require a thorough assessment, including determining the relevance of the climate hazard to the business, the financial implications, and the potential to mitigate the hazard itself. Here, collaboration with governments, cities, or other businesses will be crucial in mitigating both direct and indirect risks to operations.

The management challenges associated with this step are considerable: When should we adapt (as the industrial equipment maker did)? At what point is the risk too high? What are we doing to ensure that our workers—and the communities they live in—aren’t overlooked? These considerations, and others like them, aren’t going to be solved in one go. Managing the complications of physical climate risk is simply going to be part of your job. Good thing there’s still time to get ready—but only if you start now.