In June 2018, CDP joined Norges Bank Investment Management for a half-day workshop with investors and companies from the food and beverage sectors to build understanding of water risk, response and disclosure in agricultural supply chains. You can find an overview of the workshop discussions here.
Agriculture is the world’s largest water user, driving 69% of all water withdrawals globally.
It is also one of the main sources of water pollution: demand for livestock and feed is driving water quality degradation across the world, including countries like US, Brazil, Uruguay, Argentina, Europe, India and China.
As urban, industrial and economic growth puts further pressure on water resources, investing in sustainable, climate-smart agricultural practices and sound water management is vital – and represents a significant business opportunity. In fact, greener water practices could boost crop production by an estimated 20% globally.
The private sector: a catalyst for change
The private sector is a key player in global agribusiness, which from the farmer to the final consumer has a total value of around US$ 5 trillion.
With supply chains that wrap around the globe, companies at the top of the food chain – large retailers, producers and brewers – have the power to drive significant change across suppliers and countries worldwide.
And while these companies outsource much of their operations through a complex network of suppliers, they can’t outsource their water risks.
Take for example Heineken NV. Around 90% of the company’s water use sits within its agricultural value chain. The company focuses its water risk management efforts on breweries in water-stressed areas, such as Mexico, Indonesia, Nigeria and Spain.
Similarly, Campbell Soup reports that changes in water availability could significantly affect costs and yield for their growers, ultimately impacting the company’s production.
For these companies, and many more like them, water challenges in the value chain have the potential to directly affect their ability to generate a return for investors.
The vital first step: disclosure to inform decisions
CDP’s workshop in June aimed to tackle this issue. It brought together companies and investors to discuss and highlight the role of disclosure in understanding and responding to water risk in agricultural supply chains.
Today, 318 of the world’s largest food and beverage companies disclose water risk and response data to CDP – a 73% response rate.
By doing so, they respond to increasing investor demand for water data to inform capital allocation decisions. The number of investors making this demand has risen steadily over the past decade. Starting with just 135 in 2009, CDP now operates on behalf of over 650 institutional investors who want to understand the water resilience of businesses now and in the future.
Speaking at the workshop, investors said that CDP data helps them to inform corporate engagement conversations and identify potential red flags. For example, some investors study CDP’s data on water-related capital expenditure, following the logic that companies not investing in water-related projects now may have to spend more in the future.
Overall, however, investors said they lack the right metrics to assess the maturity of a company’s approach to managing water risks and opportunities in supply chains. This makes disclosure even more critical, as it allows companies to ensure that the right information reaches their investors.
Navigating supply chain complexity
Clearly, without engaging with their supply chains, a company’s efforts to tackle water insecurity and mitigate business risk can only go so far.
Although 60% of food and beverage companies disclosing to CDP include suppliers in their water risk assessment, just 16% requested water-related information from suppliers in 2017.
The workshop highlighted that visibility and traceability are challenges. Many companies do not have direct contact with their farmers, often working instead through intermediaries who cannot provide them with the appropriate information. This lack of information may explain why only 36% of food and beverage companies report substantive water risks in their supply chain.
For example, US agribusiness Bunge reported that the complexity of collecting and aggregating this information at scale is prohibitively costly.
Engaging the supply chain – an untapped opportunity
But there are hidden opportunities in value chain engagement. Diageo estimates that improved management of water resources, including supplier engagement, could deliver £10-20 million in benefits over the next two to five years.
In 2017, they asked 107 of their largest suppliers to complete CDP’s supply chain questionnaire on water and provide information on their water management practices, water-related risks, targets and goals. 79% of their suppliers responded, and Diageo is now using this information to improve their water risk assessment process.
CDP’s work with the food and beverage sector
Food and beverage companies will play a vital role in delivering a water secure, sustainable economy and investors have a keen interest in ensuring that the businesses they invest in are ready for this future.
Our workshop aimed to shine a light on the complexity of managing agricultural supply chains; bringing two important stakeholders together to identify solutions and the role of disclosure in unlocking them.
Our sector-specific questionnaire for food, beverage and tobacco companies, introduced this year, takes this further, offering new targeted data points on the water intensity of crop and animal products; management procedures for fertilizers, pesticides, chemical and animal waste; and irrigation and soil management practices.
CDP will continue to work with these companies to provide the insights and tools required to unlock the transformative power of this sector.
Find out more about CDP’s work on water at cdp.net/water.