Food companies are in the bull’s eye of climate change, and hotter temperatures are making water one of the biggest risks to the $5 trillion industry’s bottom line. But food companies are not only at risk from water challenges, they contribute to them. This analysis updates Ceres’ 2015 Feeding Ourselves Thirsty report, taking a renewed look at how food sector companies are responding to water risks and whether performance has improved over the past two years.
While the findings show that food companies are making progress at addressing water risks, many remain unprepared for the profound impact of climate change on the availability of the water resources that sustain their operations and agricultural supply chain.
Climate Change’s Impact On Water
Climate change is increasing the risk of both heavy rains and extreme droughts.
That’s because hotter global temperatures are creating more erratic weather patterns, which impact water evaporation, stream flows and precipitation, with wetter areas generally becoming wetter and drier areas even drier.
Farmers are contending with erratic periods of drought and deluges along with more weeds, diseases and pests – all of which reduce yield and drive food prices up.
Hotter temperatures are also melting snow melt around the world, which is a major contributor to water supply for growing regions such as California, India and Peru.
Not only is climate change compromising the availability of freshwater, but on very hot days, crops suffer stress as evaporation reduces the amount of water they can soak up through the soil.
Food companies around the globe are already feeling the effect of these drivers.
Recent examples of financial impacts include:
- In 2016, Fresh Del Monte experienced $2.5 million in asset impairments and other charges related to drought conditions in Brazil and the company’s decision to abandon certain growing areas.
- Over 1 million local retailers in Tamil Nadu, India stopped selling Coca-Cola and PepsiCo products after a 2017 drought and dwindling groundwater supplies pitted the companies’ bottling operations against local water needs.
- Illovo, Africa’s biggest sugar producer, reported a 36.5 percent drop in full year profit in 2016 due in large part to the worst drought South Africa has experienced in 100 years.
Feeding Ourselves Thirsty: Tracking Food Company Progress Toward a Water-Smart Futureuses publicly available information to assess companies on four categories of water management: governance and strategy, direct operations, manufacturing supply chain and agricultural supply chain. Companies were scored on a 0-100 point scale, using data from financial statements, corporate sustainability reports and 2016 CDP water survey responses.
Recommendations for Investors
- Review proxy-voting guidelines to include water. Asset managers can review their institution’s proxy-voting guidelines and policies to ensure support for relevant shareholder resolutions on water risk. Asset owners should engage their fund managers to ensure such guidelines are in place and are acted upon.
- Solicit improved water risk disclosure. Investors can support efforts to increase and standardize disclosure on food sector water risk. To encourage this, investors can employ a range of approaches, from engaging directly with portfolio companies, to joining relevant investor working groups and dialogues, to supporting market-level disclosure platforms such as CDP’s Water Questionnaire, GRI and SASB among others.
- Engage directly with the company management on performance improvement. Investors can use the resources from this analysis to engage poor performers individually, or through existing collaborative investor efforts on food sector water risks (i.e. Ceres’ Investor Network, the Interfaith Center for Corporate Responsibility’s (ICCR) Water & Food groups, or the UN PRI’s Water Risks in the Agricultural Supply Chain group). As a last resort, some investors may consider reducing their exposure to companies that are not managing risk effectively.
- Join collaborative investor efforts focused on water risk. Ceres’ Investor Network and associated member working group, the Investor Water Hub, supports investor corporate engagement on water risk, and also provides tools and resources to help investors evaluate and manage water risks in investment practices and decision-making. This group offers peer-to-peer sharing of leading ESG and water integration and engagement practices and serves as a collective action forum dedicated to developing more effective research methods to assess water risks and opportunities.