Supply chain switching triggers fresh risks for companies in 2024

Supply chain diversification and a string of elections are set to become the leading global risks for business in 2024, according to Verisk Maplecroft, which warns that companies reorganising their supply chains could well be swapping one set of risks for another.

With emerging economies, including Mexico, Vietnam and India, in pole position to benefit from supply chain diversification, Verisk Maplecroft said companies switching suppliers to these locations could be exposed to human rights risks. Its analysis found that human rights risks deteriorated across the range of indicators in the ten main sourcing countries – Bangladesh, Cambodia, India, Indonesia, Malaysia, Mexico, Pakistan, Philippines, Sri Lanka and Vietnam.

“An expanding raft of regulations governing human rights in supply chains means that shifting to new markets could see companies swap one set of risks for another,” said the risk analyst on publishing its Risks to Watch 2024. “Companies face a high, and in many instances rising, risk of exposure to human rights breaches in these countries.”

Dr James Sinclair, director of human rights at Verisk Maplecroft, explained: “Supply chain due diligence procedures are becoming increasingly mandatory, demanding and consequential. While nearshoring can be a superficially attractive strategy for companies looking to de-risk their supply chains, stalling progress on human rights means there is rarely a ‘silver bullet’.”

Verisk Maplecroft said a packed election calendar in 2024, when about half the world’s population are set to go to polls, creates uncertainty over the stability of political risks, while testing the strength of governance systems and the quality of global democracy.

“This year’s democracy super-cycle will shine a light on the strength of governance systems around the globe, as well as their vulnerabilities,” Verisk Maplecroft said. Twenty-two of the 64 countries holding elections this year rank in the highest two risk categories within Verisk’s democratic governance index.

Verisk Maplecroft has tracked an increase in risk for 115 of the 198 countries in the index since 2019, including the US, which dropped 29 places to 143 this time around.

Hamish Kinnear, senior MENA analyst at Verisk Maplecroft, said this decline will impact companies. “Deteriorating democratic governance is a material concern for corporates, investors and insurers as it can trigger wider political risks,” he said. “In countries undergoing democratic backsliding, the rule of law typically suffers as checks on executive power are weakened. Companies could also face reputational risks if their investments are tied to human rights abuses in a country where there is growing authoritarianism.”

There is also concern about how the outcome of these elections could impact existing conflicts in Ukraine and Israel-Gaza. Verisk Maplecroft has recorded an increase in conflict intensity risk for 17 countries over the past 12 months.

“An uptick in armed conflict across the globe poses myriad challenges to multinational businesses,” said Hugo Brennan, head of EMEA research at Verisk Maplecroft. “From increased shipping and insurance costs associated with Houthi attacks on shipping in the Red Sea through to ensuring company personnel and assets are sufficiently protected in volatile jurisdictions.”

Verisk Maplecroft also highlights increasing climate risk in 2024, following record temperatures in 2023 and this year potentially exceeding the 1.5^oC threshold for the first time.

“Crossing that benchmark will place greater scrutiny on businesses in high-emitting sectors, leaving them vulnerable to reputational and financial damage if their operations are tied to climate change,” Verisk Maplecroft said.

Companies will have to consider climate impacts in resilience planning, Verisk Maplecroft added, with 60 of the world’s 770 cities with a population of more than one million at high or very high risk of extreme high temperatures.

“Organisations need to understand how hotter cities impact them, whether that’s through higher cooling costs, failing infrastructure, health issues for workers, or even increasing scarcity of water and energy,” said Will Nichols, head of climate and resilience at Verisk Maplecroft. “Only by identifying future threats can organisations build the resilience they need to be successful in a rapidly changing climate.”

Verisk Maplecroft’s index measuring the likelihood of climate-related lawsuits against companies tracked a rise in 143 countries out of 198. It found that companies operating in developed economies facing the highest risk of legal action.

Publishing its 2024 Global Risk Agenda, Verisk Maplecroft lists the top ten risks on its radar as:

• Geo-economic fragmentation
• Conflict and security
• Impacts of climate change
• Government change and political stability
• Threats to the natural environment
• Transition and mitigation
• Global progress on human rights
• Resource governance and security
• Sustainability and resilience regulation
• Disruptive technologies.

Jimena Blanco, chief analyst at Verisk Maplecroft, said the global risk landscape for 2024 amplifies a complex set of systemic risks.

“While multinational business has always had to manage political, economic, social, security, environmental and regulatory risks, the difference now is not only the pace at which these issues are intersecting, but also the less predictable nature of how they are impacting each other,” she explained.

“The complexity and disruptive potential of these interconnecting risks has intensified rapidly since 2020, in a chain reaction that is delivering a higher risk baseline year-on-year.”

Blanco urges firms to adjust their strategies now, managing short-term threats while also looking ahead to counter future threat scenarios.