Amid growing concerns over escalating water scarcity and pollution risks, more than 60 leading North American and European institutional investors, collectively managing $2.6 trillion in assets, sent joint letters to 15 food and beverage companies last week calling for increased water risk management and disclosure practices.
The letters were sent to companies including Archer Daniels Midland Co, Dean Foods, Dr Pepper Snapple Group, Monster Beverage, Tyson Foods and Kraft Heinz Co, identified as poor performers on water management issues.
“We … believe that global water risk management is a critical aspect of financial risk oversight in the food and beverage sector,” say the letters, which were coordinated by the nonprofit sustainability organization Ceres, with support from the Interfaith Center on Corporate Responsibility and the United Nations-supported Principles for Responsible Investment. “These threats can, and already are having profound near-term business impacts on food and beverage companies that are disrupting operations and supply chains, increasing capital expenditures and operating costs, and constraining revenue growth.”
“Many food sector executives are holding onto a mistaken view that water will forever be cheap and limitless, ” said Brooke Barton, senior water program director at Ceres, who co-authored a recent Feeding Ourselves Thirsty report, which gave the companies low scores on their water performance. “But the era of cheap, plentiful water is coming to an end, and, more than ever, food companies need to address it.”
This year, the World Economic Forum ranked water crises as a top global risk. The food sector, which uses 70 percent of the world’s freshwater supplies, according to the United Nations, is especially exposed due to its reliance on water as both a direct ingredient and as an input to agricultural commodity production. Growing competition for water, weak regulations, aging water infrastructure, water pollution and climate change are having increasingly adverse affects across the food industry, from supply chains to direct operations.
Increasingly, it’s affecting financial bottom lines. Last week, Tyson Foods announced layoffs, a beef processing plant shutdown in Iowa and disappointing quarterly earnings due to reduced cattle herds from prolonged dry conditions in the Southwest U.S. Cargill also reported reduced earnings this month, in part due to the four-year drought and major impacts on beef production. And earlier this year, Illovo, a South African sugar producer, shut down a large sugar mill as drought was predicted to reduce $81 million in local production.
Limited freshwater supplies can lead to rationing and abrupt water rate hikes as competition for water increases worldwide. Interruptions in production can also increase operating costs if alternative water sources need to be found. Community resistance to corporate use of scarce groundwater resources can also lead to reputational risks.
“Global food companies need to step up their risk management of both water scarcity and water pollution,” said Stu Dalheim, VP of Shareholder Advocacy at Calvert Investments, with 13 billion in assets under management. “Beyond concerns about quarterly returns, our global food supply and water security is at risk.”
Water pollution is another growing problem. Fertilizer runoff from farms is the most significant source of water pollution in the U.S. and can create toxic algal blooms that trigger oxygen-deprived “dead zones.” Lake Erie’s ongoing algae bloom is expected to be the most severe in recent years, according to the National Oceanic and Atmospheric Administration, and the current “dead zone” in the Gulf of Mexico is larger than Connecticut and Rhode Island combined.
“Pollution from farm runoff poses environmental, reputational and financial risk to food companies, especially those in the meat industry,” said Mary Beth Gallagher, acting director of the Tri-State Coalition for Responsible Investment. “We’d like to see exposed companies outline specific practices for improving water quality for their facilities, their contract facilities and their suppliers to reduce the impacts of their operations on the right to water in nearby communities.”
The 15 companies receiving letters were selected based on their relatively low water management risk scores in the Feeding Ourselves Thirsty report. Of the 31 publicly traded U.S. companies evaluated in Ceres’ report, 90 percent cite water as a material risk in their 10-K filings, yet only 30 percent indicated that water risks were part of major business planning activities and investment decision-making.
“Better disclosure of water risks is the first step, but ultimately we’d like to see the companies in our portfolios moving from risk to opportunity with innovative water-management strategies,” said Hervé Guez, director of research at Mirova, a subsidiary of Natixis Asset Management, which manages 3.9 billion euros, including a global water and agriculture equities fund.
Participating investors have asked the 15 companies to disclose additional water risk information to the CDP Water Questionnaire in the coming year and will be following up with company management in the coming weeks and months.