Abstract

In this research, an agent-based model was developed to study the propagation of physical climate shocks through supply chain networks. By combining supply chain and financial models, the study examines the effects of climate shocks on firms’ production capacities and their subsequent impacts on firm default risk. A comprehensive mathematical framework is presented for the simulation of physical risks, their subsequent up- and downstream impacts along the supply chain, and the translation of physical impacts into an increased level of default risk. The results highlight the importance of supply chains as a transmission channel for physical climate risks and emphasize the effectiveness of implementing adaptation measures. Practical examples demonstrate the model’s behavior under different hypothetical climate scenarios and identify the sectors most vulnerable to increases in the frequency and intensity of climate events. Overall, this study provides insights into the transmission dynamics of climate shocks and emphasizes the need for resilience against climate events in supply chain networks.