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Doing the sums on sustainability

Risk & Analytics|Corporate Risk Tools and Technology|Environmental
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By Sue Newton | March 23, 2020

Food and drinks companies can ‘walk the talk’ on sustainability by better quantifying how new ways of working will make a difference.

Any organization operating in or around the global food and drink industry will be only too aware of the growing intensity of discussion about how the industry can become more sustainable. Shifting attitudes to corporate social responsibility and citizenship, legislation and public policy, and investment priorities mean that the nature and pace of the industry’s efforts to become more sustainable are increasingly under the spotlight. Action – perceived or actual, reputations and real financial outcomes are becoming inextricably linked as the public demands action and becomes almost the stakeholder of final call.

If any industry insider needed further convincing about the broader shift in the tone of the sustainability discussion, surely when someone as influential as Larry Fink, CEO of the world’s largest asset manager, BlackRock, says that measures of sustainability will be central to its future investments, it’s reason to take notice1.

Not that the food and drinks sector isn’t already, it has to be said. Indeed, evidence of action related to that change in tone is available in the sector from initiatives such as Britvic’s recent announcement of a link between future capital investment funding and meeting its sustainability goals2, not to mention the in-depth sustainability reports now being produced by many larger industry players.

Cocktail of sustainability issues

The added significance of the challenge for the food and drink industry is that sustainability issues touch just about every part of the value chain. Whether it’s sourcing, energy and water usage, waste management, approaches to packaging, supply chains, transport and distribution, or the changing expectations of consumers, few, if any, business decisions don’t have a positive or negative sustainability - and linked financial - impact. In an environment that presents such a huge choice of potential strategies and actions, doing the sums well therefore, and with the best information available, matters.

The added significance of the challenge for the food and drink industry is that sustainability issues touch just about every part of the value chain

Progressively, what we’re seeing across many industries is a recognition that these difficult choices can only be addressed through a comprehensive risk management and audit approach, underpinned by the appropriate methods and metrics. The food and drink industry is no exception.

Such an approach serves a dual purpose; firstly to enable companies to drill more deeply in to the complex and often inter-related physical, climate, liability and transition risks that are part of any sustainable transformation decision, and secondly to provide an audit trail for information that it’s putting in the public domain.

Quantification plus

So what does such an approach entail in practical terms?

On the one hand, it’s more of what many companies are already doing to monitor and measure things like water and energy use, waste, miles travelled and overall carbon footprint.

On another less explored level though, it will involve employing analytics tools and models to quantify how they will affect, and be affected by, resource pressures and the climate change trajectory. And with those factors more clearly identified, to use them to help assess return on investment from sustainability initiatives against environmental and financial objectives.

Indeed, one such application of these tools is to increasingly integrate analysis of climate risk and ESG (environment, sustainability and governance) principles in investment decision-making and financial reporting, as envisaged by initiatives such as the Task Force for Climate-related Financial Disclosures3 and the Principles for Responsible Investment4.

These typically integrate scenario construction techniques for better understanding the evolving risk exposure and potential opportunities and threats that stem from climate change and resource challenges. There can be several building blocks to these and, within each of those blocks, there could be several underlying scenarios such as a climate model, socio-economic model, climate policy model and asset model. For example, a socio-economic model would deal with potential changes in demography, economic structure and social norms that could affect how business is conducted.

Such techniques have already supported Willis Towers Watson clients in some sectors to improve their knowledge of physical and transition risk, so that they can explicitly calculate return on investment for future resilience activities or risk financing. Examples of where this kind of analysis can be useful include reviewing optimal locations for production facilities or to look at the comparative environmental and financial cost/benefits of various supply chain options.

No silver bullets

As science enables all of us to understand more about the nature of sustainability, climate change and the accompanying risks, the focus from all sides of society on identifying, managing and mitigating the risks as effectively as possible is only likely to increase. Within the food and drink industry, this focus is already apparent in companies rationalising their supply chains to deal with like-minded businesses and in more consumers making sustainability a factor in what products they decide to buy.

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One thing should already be abundantly clear from the increased attention on and debate about sustainability issues. There is no plug and play solution. Climate risk and sustainability issues, in all their emerging forms, are multi-faceted. Getting to the bottom of them will involve a complex interaction of capital, science and policy that will put added emphasis on comprehensive and more sophisticated analytics.

Sue Newton is GB Food and Drink Practice Leader in Willis Towers Watson’s Corporate Risk and Broking business.

Footnote

1 https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter

2 https://www.britvic.com/media-centre/corporate-news/2020/britvic-announces-first-sustainability-linked-financing-deal

3 https://www.fsb-tcfd.org/

4 https://www.unpri.org/

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Food and Drink Practice Leader