Editorial: Water Risks in the Food Sector: The Bottom Line
Water risks pose a growing threat to the food sector, and are causing real financial impacts for companies. Glencore Plc and Bunge Ltd., for example, have seen their oilseed profits shrink due to a prolonged drought in Canada that is reducing yields. Dairy farmers in California are struggling with increasing feed costs due in part to the severe mega drought in the state that began in 2012. And just last year, Cargill reported a 12% drop in 2014 fourth-quarter profits as a four-year drought in the U.S. Southwest damaged pastures used to raise beef.
Agriculture - A Sector Exposed to Water Risks
Agriculture uses 70% of the 1% of available freshwater on earth, and the bulk of this water is used in the agricultural supply chain, (i.e. feed grain and other inputs). Key drivers are increasingly constraining already limited supplies. Currently, one-third of the world’s food is produced in areas of high or extremely high water stress, or competition. This is due to a confluence of factors including: a growing population that is demanding more resource-intensive foods like meat, poor management of water resources, ageing and inadequate infrastructure, and water pollution—which is driven largely by overuse of fertilizer and pesticides and poor management of manure.
All of these risk factors are exacerbated by a changing climate due to greenhouse gas emissions, which according to the International Panel on Climate Change (IPCC), are speeding up the global water cycle, causing more extreme weather events, and changing weather patterns. Climate change is not only expected to fundamentally alter what can be grown and where, but to increase the prices and price volatility of agricultural inputs required for livestock feed and packaged food products.
Figure 1- Water Use in Agriculture
Investor Response to Water Risks
Investors are becoming more attuned to the financial impacts of water challenges. Many see water risks hitting corporate balance sheets and income statements of food companies (see figure 2) and they want to know how companies are mitigating these risks, as evidenced by recent articles in the Wall Street Journal and The Motley Fool. And this summer, 60 institutional investors with collective assets of $2.6 trillion sent a letter to 15 food sector companies, including some of the largest meat and agricultural products companies, asking for improved water risk management and disclosure.
Figure 2- Business & Financial Impacts of Key Water Risk Drivers
Feeding Ourselves Thirsty?
In a recent analysis entitled Feeding Ourselves Thirsty: How the Food Sector is Managing Global Water Risks, Ceres evaluated how 35 of the largest food sector companies across four industries-including agricultural products companies like Cargill and ADM and meat companies like Tyson and Hormel- are managing their water risk throughout their direct operations and supply chains. We found a large variation in performance by companies in different industries (see figure 3), and room for improvement across the board.
Figure 3- Water Risk Management Scores by Company
Companies are Responding to these Risks & Taking Action
The report also highlights how some food companies are already taking action to mitigate their water risk.
Smithfield, for example, is working with the Environmental Defense Fund (EDF) to educate growers in key grain sourcing regions on fertilizer optimization practices, which address water quality challenges and save growers in fertilizer costs.
Unilever is working with Bunge and soy growers to collect data on key sustainability metrics using Field to Market’s Fieldprint Calculator.
Coca-Cola, Unilever, Kellogg and General Mills have set time-bound goals to source the majority of their agricultural inputs from farmers using sustainable water management practices.
Companies are also becoming more involved in developing and strengthening metrics, such as by engaging and becoming members of Field to Market, the Roundtable on Sustainable Beef and the Innovation Center for US Dairy. Other efforts, such as the Field Stewards program led by the Minneapolis-based Environmental Initiative, are creating water quality trading models whereby companies can purchase water quality credits and in turn provide financial incentivizes to growers to reduce agricultural runoff from their fields.
Scaling and Strengthening the Corporate Response
While companies are taking steps to mitigate water risk, many need to step up their efforts. Of all companies evaluated in Feeding Ourselves Thirsty, 38% have not begun to conduct water risk assessments to identify and understand the key risks and impacts they face in their direct operations. And two-thirds of these companies have not conducted a risk assessment in their agricultural supply chains, where the majority of the water risk lies. Furthermore, many companies do not have strong board and senior executive level oversight over water within the company, signaling to investors that these issues are not a corporate priority.
There are a number of ways food sector companies can improve their water risk management throughout their business. And investors can play a key role by analyzing the corporate response, engaging with food sector companies on these issues and asking the right questions.
Recommendations for Company Action and Investor Analysis
Increase board oversight- corporate board members have a fiduciary duty for risk management oversight. Board charters should be strengthened to explicitly mention water and there should be ongoing dialogue and briefings by management to the board on water risks.
Conduct robust water risk analysis that extends into the agricultural supply chain - Companies should accelerate and strengthen water risk assessments, including analysis of their manufacturing and agricultural supply chains.
Tackle water risks and impacts in agricultural supply chains – As water supplies are increasingly depleted and polluted in major agricultural regions across the world, traditional risk management approaches such as hedging and geographic diversification are becoming less effective. Companies can achieve more by engaging directly with their supply chains to strengthen farmer practices and protect watersheds by setting sustainable agriculture policies and time-bound sourcing goals, purchasing certified sustainable commodities, and collecting data from farmers on their practices while providing incentives for improvement.
Improve disclosure - Publicly listed companies in the US are required by the Security and Exchange Commission (SEC) to disclose to shareholders financially material risks related to climate change and water in their operations and supply chains. Companies need to improve disclosure on water risks to investors, as well as strategies and progress made to mitigate such risks in 10-K’s, sustainability reports and CDP’s water questionnaire. Investors can play a key role here by supporting efforts to increase and standardize food sector reporting on water.
Engage underperforming companies - Investors should engage directly with corporate management to gather additional information and encourage disclosure. They should also consider leveraging existing collaborative efforts to engage companies on water risk, such as Ceres’ Investor Network, the United Nations-supported Principles for Responsible Investment’s (UNPRI) “Water Risks in Agricultural Supply Chains” group, and the Interfaith Center for Corporate Responsibility’s (ICCR) Water & Food Group.
Integrate information from water risk analysis into buy/sell decisions - Investors can integrate information from water risk analysis into buy/sell decisions by embedding water analysis into environmental and social governance (ESG) scores or conducting portfolio-level analysis of exposure to high risk regions. For other approaches and more details, see Ceres’ Investor Handbook for Water Risk Integration.
For more details about the findings and recommendations above, see Ceres’ Feeding Ourselves Thirsty report.