Tackling Climate Physical Risk in Food and Beverage Companies

Tackling climate physical risk in food and beverage companies

Climate impacts are a risk to investor portfolios. They present risks in relation to productivity and disruption to supply chains, direct asset damage, insurance costs, and increased investment into infrastructure and management responses to adapt and respond to the change in climate.  Despite this, only 23% of companies in consumer staples – meaning those products deemed essential to consumers such as food and hygiene products - have adaptation plans to address climate physical risks according to an S&P Global Assessment.

For these companies, climate risks, arising from extreme weather, water scarcity, soil degradation, and increased pest activities, extend beyond direct operations to locations throughout their value chain threatening financial value.

Engaging with the sector

To help address this issue Brunel Pension Partnership, supported by Chronos Sustainability, is undertaking an engagement programme with 20 consumer staples companies including food  and beverage producers and manufacturers and supermarkets. A group of Brunel’s clients, the Pension Funds for Avon, Cornwall, Environment Agency, Oxfordshire and Wiltshire have been actively participating in the engagement by inputting in the company selection process and joining the company dialogues. The engagement aims to help companies assess and manage climate physical risks, adapt to climate change, and understand how biodiversity is used to increase resilience, whilst building investor capacity for effective stewardship on these issues.

Chronos designed a methodology to assess companies on their approach to climate physical risks. Our framework is based on literature from TCFD, IIGCC, and UNEP and assesses companies across the four key areas: governance; strategy; risk and impact management; and metrics and targets.

Emerging themes

Brunel sent an initial engagement letter to its 20 focus companies in March 2024. As of September 2024, 13 companies responded to the letter, with 10 agreeing to meetings, 2 declining, and 1 informing us of new disclosures to be considered. Based on our engagement with 10 companies to date, several key observations have emerged:

·       The scope and quality of climate risk assessments varies significantly between companies. Diageo’s climate physical risk assessment is considered leading as it covers over 95% of its operations and supply chain and utilises location data, multiple time horizons and climate scenarios.

·       Company framings around adaptation are disjointed and tend to focus on isolated initiatives rather than approaching the topic systematically and from a holistic perspective integrating their work on water, soil and biodiversity at strategically significant locations. This is manifested in the governance of companies and the approach taken by company boards. There is a lack of explicit disclosure around how companies consider climate physical risks and biodiversity in board level discussions. An example of good practice is Danone where decision making involves local committees and teams through to multiple committees at board level which deep dives into climate and nature topics.

·       Biodiversity and nature are nascent topics, with few companies having established biodiversity policies and are in the early stages of assessing related impacts and dependencies.

·       As reflective of the broader trends within the industry, company engagements indicated regenerative agriculture lacks clear definitions, comprehensive measurement, and integrated approaches.  By integrating biodiversity, water security and quality, soil health, diverse cropping systems, livestock integration, and collective/landscape action into their regenerative agriculture strategy, and reporting on KPIs to measure progress against their Agricultural Framework, Nestlé are demonstrating leadership in this area.

·       There is a shortage of case studies demonstrating the benefits of regenerative agriculture for farmer resilience. More examples are needed to build the business case for adaptation.

·       Companies using regenerative agriculture are working with farmers on gradual improvements, recognising varying expectations and thresholds. Danone’s collaboration with suppliers to drive progress using their Regenerative Agriculture Scorecard and Environmental Handbook is regarded as a best practice.

·       As a mandatory framework, CSRD is the immediate priority for companies. The TNFD is reported to be practically challenging and appears to be poorly understood. Companies have highlighted the increasing reporting burden and the need for interoperability and alignment.

“At Danone we recognise that climate physical risk presents a material risk to our operations and supply chains both now and in the future if we do not act to address it. Water and heat stress will be exacerbated in the future altering how and where we source farmed commodities. We are taking a holistic approach encompassing climate, water, soils, biodiversity and farmer livelihoods now to build the resilience of our supply chains and supporting our farmers to transition towards regenerative agricultural practices that will reduce the risks they face from a changing climate.” 

Next Steps

Over the two-year programme, Brunel and Chronos will hold biannual meetings with each company to monitor progress, conduct an interim assessment at the one-year mark, and provide a final benchmark and summary of progress. Brunel will soon start scheduling the second round of engagement meetings with responsive companies and will consider an escalation process for those who did not respond or declined to engage.

If you are interested in finding out more about this work Faith Ward, Chief Responsible Investment Officer for Brunel Pension Partnership and Chair of the Institutional Investors Group on Climate Change (IIGCC) will be talking about this engagement programme at PRI in Person 2024 on a session about  how to build resilient portfolios for the new climate normal: adaptation, mitigation, and resilience in Toronto in October 2024.

Appendix: List of Companies

·       Anheuser-Busch InBev SA/NV  

·       Archer-Daniels-Midland Company  

·       Constellation Brands, Inc.  

·       Danone S.A.  

·       Diageo plc  

·       Heineken Holding N.V.  

·       Keurig Dr Pepper Inc.  

·       Lamb Weston Holdings, Inc.  

·       Marks and Spencer Group plc  

·       McCormick & Company, Incorporated  

·       Nestlé S.A.  

·       PepsiCo, Inc.  

·       Pernod Ricard SA  

·       Suntory Beverage & Food Limited  

·       Sysco Corporation  

·       Tesco PLC  

·       The Coca-Cola Company  

·       The J. M. Smucker Company  

·       Walmart Inc.  

·       WH Group Limited 

For more information on Brunel’s stewardship and engagement work please visit:

www.brunelpensionpartnership.org/

For more on Chronos’ stewardship and engagement work please visit: www.chronossustainability.com/