Feeding Ourselves Thirsty

By Jacob London 17 January, 2020

Ceres' latest benchmarking report finds the food sector has improved in managing water risk, but more is needed. Their London shares key findings

With USD415bn at risk from lack of water for irrigation/livestock & USD248bn at risk from changing rainfall patterns affecting crops, Ceres has assessed the food industry on water risk management
Of 35 publicly-traded co's evaluated, 91% cite water &/or climate change as a risk in financial statements, up from 69% in 2016; overall sector water risk management score rose 22% since 2017
Investors are stepping in - in Jan 2019, 83 investors with USD6.5trn in assets called on six major fast food co's to share how they manage water & climate impacts of their protein supply chains

The USD5 trillion global food and agribusiness sector operates at the centre of the world’s growing water crisis. Highly dependent on large volumes of cheap water supplies, food companies are among the first to feel the heat, as rising average global temperatures and shifting weather patterns make fresh water more scarce and agricultural production more volatile.

For an industry that uses more than 70% of the world’s fresh water to grow crops, feed livestock and process ingredients, these are undeniable threats. The U.N. projects that global demand for water will increase by 20-30% by 2050 in order to meet the food needs of a projected population of 9.8 billion.

USD415bn in revenue may be at risk from lack of water availability for irrigation or animal consumption

A recent MSCI analysis of food companies in its All Country World Index (ACWI) found that USD415 billion in revenue may be at risk from lack of water availability for irrigation or animal consumption, while USD248 billion could be at risk from changing precipitation patterns affecting current crop production areas.

Ceres’ benchmarking of the food industry’s water risk management

In order to provide investors with guidance and relevant data for evaluating how effectively food companies are responding to these risks, Ceres published Feeding Ourselves Thirsty in 2015. Ceres updated the analysis this past October, allowing investors to view how the water risk management of the food industry has progressed over the last five years.

Co’s were scored on how they address water risk through their corporate governance, in their direct operations & throughout their agricultural supply chains

Using existing corporate disclosures, including 10-K filings, sustainability reports, and responses to CDP water and climate information requests, the analysis scores companies on a 0-100 point scale based on how they address water risk through their corporate governance, in their direct operations, and throughout their agricultural supply chains. Companies were divided into four industry categories: agricultural products, beverage, meat and packaged food.

How the food sector demonstrated improvement

Companies have demonstrated increasing awareness of these risks.

Of 35 publicly-traded co’s evaluated, 91% cite water &/or climate change as a risk in annual financial statements, up from 69% in 2016

Of the 35 publicly-traded companies evaluated in this report, 91% cite water and/or climate change as a risk in their annual financial statements, up from 69% in 2016. The sector’s overall water risk management score rose 22% since 2017, and 52% since 2015.

The overall average score for the 40 companies rose 22% since 2017, as many companies showed meaningful improvements in the following areas:

  • Board oversight over water risks: A third of the companies analyzed now charge boards and senior executives with overseeing and managing water risks, up from just 8% of companies in 2015;
  • Water use and efficiency targets now seem to be standard practice. As of 2019, nearly all companies – 90% – have set water use efficiency targets for their operations, though the ambition and speed of these targets vary. In fact, only a small minority of companies have disclosed targets that aim for more aggressive reductions in regions of particular water scarcity in their operations and/or supply chains, and
  • Water risk assessments: Food companies are doing more to analyze the water-related physical, regulatory and reputational risks they face. More companies now assess water risks not only to their facilities, but also to their agricultural supply chains. Since 2015, the proportion of companies assessing both areas has jumped from 35% to 67%.

Critical improvements still needed

Despite these improvements, effective management of water risk still lags, as the average overall company score is 38 out of 100. The sector saw limited progress on many critical issues:

  • While more companies now assess water risks in their agricultural supply chains, the scope and rigour of these assessments are often limited. Many assessments still fail to account for risks other than water scarcity, ignoring agricultural runoff, impaired ecosystems, regulatory risks and the concerns of local stakeholders.
  • Companies can make their supply chains more resilient by supporting sustainable farming practices in the watersheds where their most significant commodity inputs are sourced. Yet 37% still lack goals to source crops in ways which reduce impacts on water use and water quality. Additionally, existing goals often lack clear definitions, implementation plans and measurements of progress.
  • Soil health is arguably the most important indicator of agricultural resilience to drought and other extremes in precipitation. Yet less than half of companies have provided any form of financial support to growers to encourage adoption of sustainable agricultural practices.

The meat industry remained the lowest-performing industry

Finally, meat companies, which are acutely vulnerable to water risks, also continue to do the least to manage them. The meat industry remained the lowest-performing industry as meat processors continue to do relatively little to ensure resilient supply chains. Every meat company (other than Smithfield Foods) ranked in the bottom half of all companies assessed.

Recommendations for investors

For institutional investors, and universal asset owners in particular, water risks are systemic and material.

More investors are exercising active ownership of their holdings in the food sector to proactively mitigate water & climate risks

A group of more than 100 institutional investors with more than USD25 trillion in AUM are collaborating to advance methods for analysing water risks as part of Ceres’ Investor Water Hub. More investors are exercising active ownership of their holdings in the food sector to proactively mitigate water and climate risks. In January 2019, a group of 83 investors with a collective USD6.5 trillion in assets called on six major fast food companies to share how they will manage the water and climate impacts of their protein supply chains.

These efforts underscore how water stewardship is not just an environmental concern, but also a financial imperative. With the effects of climate change already being felt worldwide, and with steadily increasing demand for water-intensive goods from a rising global population, companies must evaluate, manage and mitigate their water risks in order to offer competitive returns to their investors over the long term.

To hear directly from corporate and investor experts on the implications of this analysis, watch our recent webinar discussion of this report here.

Further Reading

  • Role Of Businesses In Water Conservation – With the backdrop of Singapore’s industrial water challenges, Professor Asit Biswas & Dr Cecilia Tortajada show what Unilever & Nestle are doing on water management but also the behavioural challenges they face
  • Global Agriculture & Water Scarcity –  With more than 25% of global agri grown in high water stress areas, WRI’s Frances Gassert tells us why tension between global crop production & water supply is expected to grow
  • Organic Agriculture Can Fight Climate Change – Organic agriculture is so much more than no pesticides as CEO of Go Organics, Spencer Leung, shows with lower GHG emissions, reduce energy & mitigating climate risks to farmers
  • Food Revolution 5.0: Digital Printing Meat – Food Revolution 5.0., clean meat… Hong Kong is there. Get the latest from Professor Kenneth Lee of Chinese University of Hong Kong and hear more on his 3D printed foie gras
  • Water-Energy-Food Security Nexus In Asia’s Large River Basins – The water-energy-food security nexus is complicated but as Maija Taka, Marko Keskinen & Olli Varis show, the tensions can be alleviated. Plus, they share 3 WEF cases in Asia’s largest river basins

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Jacob London
Author: Jacob London
Jacob London is a Senior Associate with Ceres’ Water Program and a co-author of the 2019 edition of Feeding Ourselves Thirsty. He also coordinates shareholder engagement of the food industry focused on climate and water risks and works with institutional investors to improve their understanding of the financial risks associated with global water stress.
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