Steering Trade and Supply Chains Amid Weather Challenges

Climate Volatility Disrupts Global Supply Chains

Climate volatility and extreme weather events are disrupting global trade routes, impacting supply chain reliability and leading to financial losses. The interconnectedness of trade today adds complexity to the already-challenging exercise of mapping supply chains and mitigating exposures. It’s not uncommon for an event in one region to have downstream impacts on a business on the other side of the world.

Natural catastrophes and impacts of climate extremes can further exacerbate financial and reputational challenges when overlain with other geopolitical and socioeconomic risks. For example, increasing construction expenses, coupled with a shortage of skilled labor and supply chain disruptions, have driven up the costs of rebuilding efforts in the wake of natural disasters.

As the frequency and severity of climate events continue to rise, it’s crucial for businesses to integrate climate risk assessments into their strategic planning. The need for climate-resilient infrastructure and diversified supply chains is likewise becoming more pressing.

Mapping Climate’s Impact on Trade

Climate-related events in recent years have had widespread repercussions for global trade:

• Droughts in Central America in 2023, compounded by El Niño, caused water levels to drop in the Panama Canal, reducing the number of ships that could pass each day.
• Smoke plumes from the 2023 Canadian wildfires spread to the U.S., dropping solar farm production and delaying hundreds of flights. The 2025 wildfires across the Los Angeles area also affected supply chains, causing a slowdown on L.A. port routes. Resident evacuation additionally contributed to traffic issues that impacted transportation routes and caused a reduction in supply chain workers.¹
• Hurricane Helene in the U.S. became the costliest event of 2024 from an economic loss perspective with an estimated $78.7 billion in total direct damage.² Businesses in affected areas reported supply chain disruptions, reductions in operating hours, and damage to property or physical assets.³
• Floods in Spain in 2024 disrupted production and supply chains in the automotive sector. Widespread flooding that year in China, India, Bangladesh and Nepal significantly impacted transportation and agriculture. Notably in Bangladesh, nearly 19 percent of the affected population reported a loss of employment and 53 percent reported a loss of income, most likely due to the loss of agricultural labor opportunities after flooding in August and September.⁴

Industry Perspectives on Climate Impacts

Beyond regional exposures to climate volatility and extreme weather, the impacts of these risks on businesses vary widely across industries. Two notable sectors impacted by a changing climate include:

Food, Agribusiness and Beverage (FAB)

Climate volatility and severe weather events like droughts and heatwaves are causing crops to fail, reducing yields and creating food shortages. Studies suggest that on average, yields of key crops have already declined by around 5 percent.⁵ This trend is even more pronounced for luxury crops, such coffee and cocoa, which are particularly sensitive to temperature changes and typically sourced from countries facing extreme temperatures, droughts and flooding.

In Central America, coffee yields have decreased by over 10 percent, contributing to a 40 percent year-over-year increase in coffee prices.⁶ Colombian farmers, who often lack insurance and financial safety nets, face prolonged recovery periods after such events that lead to supply chain disruptions.

As prices for these and other crops rise, so too does cargo risk. Agricultural shipments now cost more and supply chain delays — in part caused by weather events — can exacerbate this risk, as agricultural shipments are vulnerable to spoilage.

Rail

The rail industry is a critical component of the supply chain. Any disruption can significantly impact the economy and the transport of goods. Moreover, companies in the industry often rely on a handful of global suppliers for critical components, exposing them to unique challenges.

Large weather events, such as hurricanes and wildfires, have caused substantial losses for railroads. U.S. hurricanes in 2024 alone led to significant business interruption losses and costly infrastructure damage, with the cost of replacing a mile of railway track ranging from $1 million to $2 million.

Wildfires in North America have also become a significant concern for the rail industry and are now considered a catastrophic exposure, according to Otis Tolbert, Aon’s global industry specialty leader for rail. “This change has financial implications for clients as their deductibles for wildfire damage can now reach $100 million, up from $25 million in the past,” he says.

4 Strategies to Help Supply Chains

1. Implement climate-resilient infrastructure:
   
   Retrofitting or fortifying existing assets to withstand property perils can be expensive. In many cases though, it’s worth the investment. For instance, constructing an edifice to a “building code-plus” standard — that is, beyond what the current building code requires — can be a difficult capital decision. With the right data and risk quantification, however, businesses can make informed decisions about infrastructure-focused risk mitigation for various perils.
2. Use natural catastrophe and climate models:
   
   Physical risk modeling tools can help organizations assess exposure to natural catastrophe events and climate extremes across their supply chains, as well as quantify the financial impact of a range of potential events. These models can measure the value at risk today and into the future under various emissions scenarios and evaluate vulnerabilities in the portfolio to develop tailor-made mitigation strategies.
3. Diversify supply chains:
   
   Supply chain disruptions due to weather can occur at various points and across multiple nodes that span regions, highlighting the importance of diversifying supply chains. If it’s possible and alternative suppliers are available, organizations should implement diversification to ensure that a disruption in one node doesn’t have a substantial impact down the line. While this may come at a cost, it effectively represents an investment in resilience.
4. Enable supply chain visibility:
   
   Managing supply chain risks is a complex challenge that typically falls under the purview of procurement or supply chain directors rather than the risk office. Large multinationals may trace their supply chains down to the second tier, but beyond that, it can be more challenging. Many companies have focused their risk management efforts on first-tier suppliers, given the concentration of risk often found in these entities. Where possible, risk management efforts should focus beyond this tier to build out full-scale visibility of an organization's supply chain. This will help create a more resilient enterprise, as well as provide underwriters with better information to provide access to fit-for-purpose insurance coverage.

Aon's Capabilities

¹ Measuring the supply chain impact of the LA fires, ASU News
² National Hurricane Center Tropical Cyclone Report: Hurricane Helene, NOAA
³ The Impact of Hurricane Helene on Fifth District Businesses, Federal Reserve Bank of Richmond
⁴ Bangladesh: Impact of the floods on agricultural livelihoods and food security in the eastern part of the country, FAO
⁵ How will climate change affect crop yields in the future?, Our World in Data
⁶ 2025 Climate and Catastrophe Insight, Aon