Commentary: What’s ahead for climate change and industrial supply chains

The ruling on December 20 is the culmination of legal proceedings initiated with the November 2012 letter. In its ruling, the Supreme Court of The Netherlands ratified a ruling in favor of Urgenda by a lower court in the Hague on June 24, 2015.

Urgenda has served as inspiration for citizen groups in Belgium, Canada, Colombia, the European Union, France, Germany, India, Ireland, New Zealand, Pakistan, Switzerland, the United Kingdom and the United States to initiate legal action against governments in those countries.

On March 30, 2015, an international group of legal experts announced the Oslo Principles, an outline of how existing law places legal obligations on national governments to combat climate change more aggressively. More details about the Oslo Principles and the obligations national governments face are available here. Corresponding details about the Oslo Principles and the obligations businesses and enterprises face is available here.

Decarbonizing supply chains – private initiatives increase, investors start diverting capital

On January 1, 2020 the International Maritime Organization’s (IMO) rules to reduce the amount of sulfur oxides in marine sector emissions in international waters go into effect. My article about this ran on FreightWaves on April 30 – Big changes looming in the maritime industry – its only just begun! Check out PKVerleger LLC’s collection of news articles on this topic between April 2018 and December 31, 2019: IMO 2020 Watch^TM.

In a related development, on December 18, a coalition of eight shipping organizations submitted a Proposal to establish an International Maritime Research and Development Board (IMRB) that would oversee a $5 billion fund to seek technical solutions to the challenge of decarbonizing the world’s maritime merchant fleet through a mandatory contribution for each ton of bunker fuel consumed by shipping companies.

Similar initiatives will proliferate as: first, severe weather events become increasingly disruptive to industrial supply chains, pushing up the cost of insuring corporate supply chains; and second, the outcry about climate change increases and consumers start voting with their wallets as well as their votes.

In a Stanford Global Project Center Working Paper, Is ‘Being Green’ Rewarded in the Market?: An Empirical Investigation of Decarbonization and Stock Returns, Soh Young In of Stanford University, Ki Young Park of Yonsei University, and Ashby H. B. Monk of Stanford University state: “We find that an investment strategy of “long carbon-efficient firms and short carbon-inefficient firms” would earn abnormal returns of 3.5 to 5.4% per year, and indicates that investing in carbon-efficient firms can be profitable even without government incentives.”

The study is based on 74,486 observations from 736 U.S. firms between January 2005 and December 2015. The authors state, “Our findings are not driven by a small set of industries, variations in oil price, or changing preferences of bond investors caused by the low-interest-rate regime, starting with the 2008 financial crisis.”

If this finding is replicated by other researchers, one can expect that a third reason why the decarbonization of supply chains will gain momentum is that institutional investors will come under increasing pressure to favor companies taking steps to decarbonize their supply chains.

Exponential technologies – maturity, and increasing deployment in industrial supply chains

There are two ways to think of exponential technologies: first, they are technologies that benefit from Moore’s Law; and second, their positive performance characteristics increase exponentially, while the related costs of producing and adopting them in industrial and consumer applications decrease exponentially. Our World in Data does a great job explaining the forces at play here: Exponential progress – Moore’s Law.

In 2020, we will start seeing such technologies applied much more rapidly to industrial processes and industrial supply chains than we have in the past. We have already touched on the factors that will lead to this. Additionally, in some industries, market forces will induce companies to act much sooner than they would have otherwise.

Here’s an example. On December 21, the Wall Street Journal reported in Walmart’s Secret Weapon to Fight Off Amazon: The Supercenter that Walmart is modifying its corporate and business strategy to compete more directly with Amazon. This follows an article published on May 13, 2018 by the Financial Times, Walmart shifts global strategy to battle Amazon. That in turn followed another article published by Digital Commerce 360 on January 25, 2017, Wal‑Mart’s strategy shift comes with 200 e‑commerce job cuts.

This has been happening as Amazon has built a supply chain logistics business that is threatening FedEx and UPS as well. This trend is going to unfold in several industries as digital native challengers compete with digital immigrant incumbents. The nature of this competition will involve digital native challengers attempting to seize the more profitable and difficult to imitate aspects of traditional businesses through the application of exponential technologies, leaving digital immigrant incumbents with the less profitable and commodified aspects of the business. In another example, the container shipping giant Maersk is attempting to forestall such a future by transforming itself into a digitally enabled, end-to-end supply chain logistics platform.

What questions do these observations raise?

Broadly speaking, here are some questions these observations raise.

First, will there be a difference in the way people in democratically and non-democratically governed countries approach the issue of getting politicians and governments to take meaningful action towards tackling the problem of climate change?

Second, how will companies self-organize to collaborate with one another to accomplish a systemic decarbonization of supply chains in various industries, across national boundaries? I do not know any good examples from history of companies having tackled a challenge of this scale and magnitude in the past. Do you? I hope it happens, and that progress comes quickly. However, the optimistic realist within me feels rather pessimistic about the prospects.

Third, will the process of deploying exponential technologies within industrial supply chains happen quickly enough without a bit of nudging, and perhaps outright coercion, by regulatory bodies and governments? My knowledge of history suggests to me that the transformation will require government action AND market forces.

Do you think the next two or three years will be business as usual in supply chain, or do you think we may be witnessing significant changes taking place in the industry? What other questions do you think the year 2020 raises? Let us know by leaving a comment below.

If you are a team working on innovations that will refashion global supply chains, we’d love to tell your story in FreightWaves. I am easy to reach on LinkedIn and Twitter. Alternatively, you can reach out to any member of the editorial team at FreightWaves at media@freightwaves.com.