Trends are causing problems in the food industry
And these are among others:
- changing consumer preferences
- new regulatory requirements
- Food supply must increase in view of the growing world population
Climate change also has consequences for companies’ sales and profits. Climate-related risks threaten the financial performance of companies and put pressure on the industry’s business model. This is the result of the analysis “The Food Industry in the Spotlight of Climate Change” by Pricewaterhouse Coopers GmbH, or PwC for short.
The consequences of climate change are already clearly noticeable now
In the drought summer of 2018, the agricultural yield for cereals per hectare fell by around 16% compared to the three-year average. This was reported by the Federal Ministry of Food and Agriculture. “The food industry should explicitly integrate climate risks into all its strategic decision-making processes in the future. The effects of climate change will be reflected equally in demand behaviour and cost structures – much more so than is already the case today,” warns Dr Christian Wulff, Head of Retail and Consumer Goods at PwC Germany.
These are the risks of climate change
On the one hand, there are physical anomalies such as hurricanes and long periods of drought. These primarily concern agricultural production. Such risks have a direct impact on both crop yields and livestock. But supply chains may also be disrupted, which in turn hampers the production process from farm to supermarket.
In addition to physical risks, there are also so-called transitory risks. These relate to the transition to alow-carbon economy. If prices are levied onCO2 emissions, costs for energy and raw materials also rise.
Climate reporting: This will help you
In 2017, the Task Force on Climate-related Financial Disclosures (TCFD) provided recommendations to ensure that climate risks are well accounted for. This framework provides companies with good options for consistently integrating the impacts of climate change into their reporting. Scenario analysis is a helpful tool. With their help, the risks, opportunities and consequences of climate change can be better understood.
Scenario analyses take effect where traditional methods no longer help. They present the consequences for the business models of food and beverage manufacturers in a tangible way. What are the consequences of ocean and global warming on corporate financial performance? How can resilient solutions be developed in time? Dr. Nicole Röttmer, Partner and Climate Lead at PwC Germany, values scenario analyses as a source of answers to these questions.
Report climate-related risks now!
In this case, less is by no means more. Only 45% of companies in agriculture and the food industry account for the impact of climate-related opportunities and risks. Not even half of the companies present how this relates to their business, strategy and financial planning. TCFD states in its 2019 status report. Only 4 % make a statement on various climate scenarios.
However, the signatories to the United Nations’ Responsible Investment Initiative are already required to report on climate indicators this year. These clues must address the use of scenario analysis.
Strengthening resilience to the impacts of climate change
PwC’s scenario analysis uses various assumptions to show the consequences for food producers if the earth warms by 2°. Transition risks have different effects on the performance of individual product groups and companies.
Comprehensive policy measures are needed to achieve the 2° target. These can vary greatly from region to region. If, for example, aCO2 price of 100 US dollars per ton is set in Europe and America, the result will be a loss of margins and competitive disadvantages.
The cost of raw materials and electricity could increase. As a result, the total cost of production in Europe may also increase by around 30 % by 2030. If companies do not focus their actions on the consequences of climate change, the effects on the entire production sector will be negative.
Experts are now even predicting global warming of 3°. That is why the entire food industry has to deal with this scenario. That’s what Christian Wulff says. In the scenario, there is a shift in probability from transitory risks to physical risks.
Nicole Röttmer’s conclusion is that food processing plants and companies must ensure their strategic resilience in the face of climate change. In this way, they remain competitive and do not have to fear a loss of sales and other negative financial effects.
Ehlert brings you into safe waters
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