In many ways, 2021 was the year that investors and companies stepped up to address climate change, with historic commitments making the front page of newspapers on a regular basis. Unfortunately, the same cannot be said for water. Missing from these stories were concrete action plans to address water pollution and scarcity. And just like with the climate crisis, we are running out of time to address this issue — a new report released this year by the IPCC suggests that the frequency and intensity of droughts exacerbated by climate change are poised to ratchet up over the next decades.
This summer gave a preview of the toll more frequent droughts will take, with farmers in the American West fallowing fields, ploughing under fruit and nut trees and selling off cattle because of high feed prices and lack of water. In fact, no sector has a bigger role in deciding how we will manage through the existing water crisis than the food and agriculture sector. This $6 trillion industry uses a whopping 70 percent of freshwater resources worldwide. And yet, new research from Ceres suggests that the food industry is not meeting this challenge — and is fundamentally unprepared for a water stressed-world.
What are the missing pieces?
Our most recent edition of Ceres’ Feeding Ourselves Thirsty benchmark analyzed and ranked 38 of the largest food and beverage companies across the globe on their water use and management practices. The results were not impressive. The food sector overall racked up an average score of just 45 points out of a total of 100, with the meat sector lagging significantly with a total of just 18 points.
Graph of the top and bottom performers on water in the food sector. Image courtesy of Ceres.
Granted, some companies have notched progress since our last benchmark report in 2019. One bellwether of a significant commitment to water is the role it plays in high-level decision making. Some 71 percent take water risks into consideration in planning major business activities and investments, up from 58 percent in 2019. And 53 percent of companies link executive compensation to water and sustainability performance goals, up from 33 percent in 2019.
However, the food industry is overlooking the area where it needs the most help: the fragile supply chain. The food industry is dependent on the ranchers and farmers who make up the supply chain, many of whom are in highly water-stressed areas and produce water-intensive products. But only 18 companies even assessed the vulnerabilities of their agricultural supply chains to water scarcity. Even fewer are focusing their support where it is most needed — only 12 companies are providing support to farmers growing essential ingredients in high-stressed water basins, and only nine implemented water reduction targets for their supply chain’s key growing regions.
What are the stakes?
Failure to manage water where it matters most shows that there are still critical parts missing from stewardship practices of food companies. If this oversight is not corrected, more than our dinner plates will be affected. The financial fallout will affect all of us — with the higher cost of producing food under these conditions being passed on to consumers, forcing farmers and ranchers to make difficult decisions, and exposing investors to material risk.
Due to a drop in the water supply, a beer plant’s water permit was denied. Now the plant is being dismantled.
Price volatility of ingredients, reduced access to inputs, loss of markets, legal actions for negative environmental impacts, and stranded assets are all real risks that investors take on when investing in the food sector.
For example — when beer maker Constellation Brands Inc. began construction on a $1.5 billion plant in Mexicali in 2016, it was expected to consume 20 million cubic meters of water annually from the Colorado River Basin. But due to a drop in the water supply, the plant’s water permit was denied. Now the plant is being dismantled — costing the company an asset impairment of $680 million. Preparing for this type of fluctuation must become a routine consideration for investors, as the water crisis grows in intensity over the coming years.
What can be done about this?
Investors have considerable power to help turn things around. An $11.4 million global investor engagement launched in 2019 by Ceres and global investor network FAIRR urged the largest fast-food brands to reduce their supply chain greenhouse gas emissions and manage water use more sustainably. As a result, five out of the six companies publicly agreed to set emissions reduction targets, which should also lead to positive water outcomes through land use changes, and half have assessed the water risks in their supply chains.
By leveraging the Feeding Ourselves Thirsty analysis and joining investor initiatives such as Ceres’ Valuing Water Finance Initiative, investors can spur corporations to act on water-related risks and raise awareness about these risks in the capital markets.
The Ceres’ Valuing Water Finance Task Force was convened to help address these concerns. An advisory council of major investment funds, financial institutions, and banks, the Valuing Water Finance Task Force helps make the case for corporations to mitigate water-related financial risks and encourage corporate leaders to implement sustainable water practices. In its next phase of work to be launched next year they will release a framework of specific steps based on scientific and academic research for corporations to take and galvanize investor engagement with companies around water risks,.
The key to change lies with this large tent of investors and the companies they own. Let’s hope they take up the mantle — before it is too late.