I'm your host, Sue Newton, head of WTW UK food and beverage practice, and I'm really pleased to be joined today by my colleagues Jennifer Bonner and Moiz Bohra from our climate risk team. We'll be discussing the biggest climate risk challenges businesses in the sector are facing, and we'll be exploring the practical steps you can take to build resilience. So, Jenny, could you start us off, please, giving us an overview of the impact of weather volatility on the food and drink supply chain?
JENNIFER BONNER: Sure, Sue. So, weather volatility here we're thinking particularly about hazards such as floods, droughts, storms and heat waves. And extreme weather like this can have an impact across the supply chain. Firstly, thinking about agricultural impacts, they can damage crops, so potatoes, tomatoes, and combinable crops such as wheat, barley, oats, and oilseed rape they can have an impact on livestock well-being. So, thinking about potentially extreme heat and also flooded grazing land. So, availability of food. So, these can lead to losses and additional input costs.
We don't really need to tell anyone about weather volatility as it's been experienced in the here and now so just to add a bit of context to that, the UK experienced record breaking rainfall in the autumn of 24 and this disrupted drilling and crop establishment, but that was immediately followed by the driest spring in over 100 years earlier this year, and again, that impacted crop development, especially thinking on wheat, barley, and oats.
So, volatility can disrupt harvest schedules and also transport logistics. It's important to recognize it can be tricky because regional variations, both globally and here in the UK, can be difficult to plan for. So, for example, the Southeast of England and Scotland and Northern Ireland within the UK can experience very different weather conditions at the same time.
This year, unfortunately, it looks like weather volatility has caused a reduced harvest. We're looking at the fifth-worst harvest on record since records began in 1984 and since 2000, there have been three of the five worst cereal crops on record. So, I think it's worth noting here that this is starting to hint towards long-term trend changes as well as that volatility piece. So, it's important if a business is to look more at chronic changes to climate, as well as that immediate volatility that might be experienced.
So, things like long-term changes in temperature or precipitation regimes, thinking about that warmer, wetter winters, hotter, drier summers that the Intergovernmental Panel on Climate Change advocates as a main narrative.
Weather volatility can directly affect market volatility and trigger price spikes; that's something also to really note the impacts that can be caused. And we saw this at the end of the year, December 2023. We saw Maris Piper potatoes soaring to 158% increase on that year end, and that was due to very heavy rain in Northern Europe, damaging potato fields across Belgium, France and the UK.
So, just an extra added thing in there is it's crucial to consider that it's not necessarily that there'll be a full harvest failure. It's often the impact of the grade of that harvest that can impact the income of the producer, but crucially on supply chains for ongoing production going forward. So, I'm sure that lots of us will have seen the latest series of Clarkson's Farm, where his barley didn't make milling grade, so it had to be sold for a fraction of the price to go for animal feed.
And this is something that's been seen nationally as well. There has been, I think, a 20% drop in that excellent grade across those combinable crops. So hopefully that's an interesting insight, Sue, to into some of the impacts of weather volatility that we're experiencing now and thinking about those long-term trends.
SUE NEWTON: Thanks, Jenny. And I think it's pretty clear that we don't see things improving in the future in terms of the direction of travel.
JENNIFER BONNER: No. The direction of travel, unfortunately, extreme weather is projected to become more frequent and severe. And crucially, with unpredictable localized impacts. So it is important to consider that weather volatility, but also those more chronic changes that could affect customer demand and also preferences. So, thinking if we're going to get more hot weather, how would that affect potentially customer preferences, customer demands, and I think Moiz will speak to this a little bit more on the transition side in a few moments.
But also thinking around those customer expectations, around sustainability and transparency. These are projected to increase, and obviously that will put pressure on businesses to show that they're doing a real good job of understanding the risk and being able to demonstrate how they're mitigating and adapting to that risk. And crucially, the risk itself is fundamentally financial. So business interruption and also reputational damage can affect a business's bottom line, so it really is important that it's considered.
SUE NEWTON: Moiz, could you talk to us a little bit about how food and beverage businesses are working towards decarbonization, aligned to net zero and where the gaps are, please?
MOIZ BOHRA: Sure. Thanks, Sue, and thanks so much for having me on the podcast. In terms of where the food and beverage sector is today, I think just like a lot of other sectors, we're currently seeing in general, perhaps a slowdown or a deprioritizing of the net zero goals. Unfortunately, that's just given regulatory developments, etc., around the world, where that might not be as much of a focus, especially given that there are other more pressing concerns that consumers have front of mind being inflation and the rising price of basic food and beverage goods.
Where obviously decarbonization and the net zero goals can help, is that there are many places where that might lead to benefits and potential reductions in cost and potential improvements in food security as well, so we can talk a little bit more about that, but essentially, in general, what companies are doing in this sector at the moment is definitely picking the low hanging fruit, pardon the pun, but essentially where we're seeing progress is towards greater adoption of renewable energy, for example, where that is available so even in the UK, for example, renewable costs continue to decline, companies are able to sign power purchase agreements, get access to that low-cost green energy, which can already have a significant impact on emissions reduction.
And at the same time, companies are also starting to invest in a certain amount of decarbonization within their own processes as well. So, particularly when you look at food processing, it's still quite an energy-intensive process, which means that any switch from, let's say, gas to electricity for heating or any other green fuels like biofuels, for example, has the potential to significantly reduce emissions there.
The other area where companies have been trying out solutions is around food packaging. Obviously, this has also slowed down perhaps in the last couple of years, but there was a lot of momentum a few years ago to try and reduce the amount of single-use packaging, to try and reduce the amount of fossil fuel-derived plastics, and to switch to more renewable or recyclable materials such as aluminium, paper, and bio-based plastics. There are a few different solutions out there.
Obviously, it's been a bit harder from a cost point of view to be able to make those switches when those other greener raw materials are a little bit more expensive, and so, at the end of the day, inflationary pressures within the wider economy might reduce the incentives for companies to make that switch in a very cost-conscious environment.
However, those are the low-hanging fruit where the bigger challenges lie. And as you asked about the gaps towards net zero alignment, agriculture and the associated land use change sector which is when you for example, might be converting forests into grazing land for animals, for example which is obviously not aligned to climate goals between the agriculture and that land use change sector we might be anywhere between 1/5 and up to 1/3 of total global emissions.
So very, very large contributor and driver of climate change, which means that food and beverage companies have a lot more work that they need to do to make sure that they're not procuring commodities from areas that are at risk of deforestation, making sure they have that visibility upstream within the supply chain.
But at the same time, there's also a question around shifts in diets as well. So again, this has slowed down in the last couple of years, but essentially, there was a lot of interest in plant-based foods as a way to reduce the carbon emissions of the calories we consume. And so, the rise in lab-grown proteins, plant-based proteins as an alternative to carbon-intensive meat and dairy, is something that is part of that wider decarbonization journey but obviously leads to a controversial opinion sometimes about whether these diets can be changed and whether people might be willing to do that.
So obviously, we don't all need to go vegan. We don't all need to completely switch to plant-based diets, but any of reductions in the use of animal-based protein can contribute quite significantly to lowering emissions from agriculture where obviously methane emissions from cattle are a pretty big source of emissions, but at the same time also reducing that pressure on forests because you no longer need to deforest as much in order to grow a soy or to graze cattle, for example. So, these are the bigger solutions for decarbonizing the sector, but are perhaps a little bit harder to achieve in the regulatory environment where we are today.
SUE NEWTON: It's really interesting. Thanks, Moiz. And in terms of the regulatory reporting requirements that businesses in the sector are subject to, can you tell us a little bit about those and how those are expected to change in the future?
MOIZ BOHRA: Sure. Switching gears a little bit away from that wider focus on understanding climate risks and transition risks in terms of what companies are required to do at the moment, they have been for the last couple of years here in the UK, for example, been subject to the TCFD (Task Force on Climate related Financial Disclosures) standard, so that's the task force for climate-related financial disclosures, which requires companies to report qualitatively on their climate-related risks and opportunities.
So that tends to be one part of their annual report or they might have a separate sustainability report, and companies that exceed a certain revenue threshold. So, all of the major publicly listed companies are required to report those risks. And that was also implemented as part of UK regulation to even cover companies that might not be publicly listed, but they have to when they file their accounts at Companies House to still include that TCFD-aligned risk and opportunity list.
Where that is changing over the last couple of years is that we're moving towards more international standards. So, we have the International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards, for example, which is the global accounting and financial regulatory body that sets standards for climate-related risks that go a little bit beyond the prescriptions of TCFD, and these are being increasingly rolled out in jurisdictions around the world.
In the UK as well, we expect that to be implemented. It's currently in a consultation process, but we expect an implementation timeline, perhaps sometime in the next couple of years. At the same time, we've also got regulatory reporting requirements in Europe as part of the CSRD, the Corporate Sustainability Reporting Directive, which requires companies to disclose these climate risks. And that's in a phased process as well, depending on the size of the company, etc., over the next few years.
At the same time, there are also requirements in California which are aligned with the TCFD standard and given California's size within the US economy, but also in the global economy, any companies that sell products or services in California are required to disclose against that, too.
So there's a few different standards at varying levels of complexity and where companies are looking to try to move up that of ladder in terms of complexity, they're trying to get to grips around, first of all, understanding what those climate risks and opportunities are, being able to express them as part of a risk register and enterprise risk management (ERM) framework, but then increasingly the IFRS and CSRD standards require financial quantification of risks and opportunities.
So, companies not only have to discuss or disclose in a qualitative way what those risks are, but then try and put some financial figures around whether that will be a revenue loss, or an increase in costs, or a Capex investment needed. The costs that companies are starting to bear as a result of climate change. Those need to be disclosed so that investors have a much more holistic understanding of how climate exposed their investments are going to be.
SUE NEWTON: So, I guess at the moment this is mostly about PLCs and larger businesses in terms of how those are defined by turnover and number of employees. Is there going to be a move towards the regulations coming down to smaller businesses over time?
MOIZ BOHRA: I think the intention behind the regulation, let's say, when they were first being discussed a couple of years ago, was definitely to try and capture more of the share of companies out there, but we have seen in the recent year or two a slight pulling back of ambition. So, the biggest signal has been the CSRD in Europe revising its requirements. So that's been part of the omnibus, which is now progressing through various levels of European legislation, but essentially, what that's done is it's reduced the number of companies that fall within scope. So, they've increased the threshold for revenues and number of employees, which means that fewer companies actually have to disclose against the CSRD standard.
Now, obviously, where smaller companies might still need to do so, it might be more on a voluntary basis, particularly as the bigger companies that do it may have requirements for their own suppliers, for example, to have a reporting on their climate risks and opportunities. Increasingly, we're seeing that as part of tendering processes, for example, and even the smaller companies within the supply chain have to demonstrate that they've understood the risks. They're making sure that they're taking steps to mitigate those risks so that they don't pass those extra costs on to their bigger clients and customers.
SUE NEWTON: I guess that's the potential upside. The opportunity side of that really is getting ahead of those requirements in terms of opportunities to trade with some of these larger customers.
MOIZ BOHRA: Absolutely. So, we're seeing the more engaged that companies are with their climate-related risks and opportunities. They're able to pass those tendering processes, and they're able to get their foot in the door. And then obviously there are other decisions that might determine whether they actually win those contracts or not, but having done these climate-related assessments is definitely an important way to start that process.
Where there are further benefits of doing this analysis is that the learnings can be quite insightful. So if you know that you are in a flood prone zone, you need to start taking adaptation decisions, whether that's again low-hanging fruit that you might start with and then make the further, more capital intensive investments, you can get a clear plan of action over the next few years as to what you need to do as the risks continue to escalate.
At the same time, from the transition point of view as well, these insights can help you understand when to begin looking for new suppliers for lower carbon products and services, what capital investments you might need to make and when, and where there might be new opportunities as well. Let's say, for example, from plant-based protein products or any other lower-carbon products and services that consumers might be demanding.
So, it's important to recognize that all of this is not just serving a compliance need. Obviously, you do need to report against any mandatory requirements, but you can really embed these learnings into the rest of your organization, you can engage with stakeholders across risk, finance, strategy, sustainability, product, operations, etc. and all of these risks need to be owned within the organization to make sure that you're actually deriving the benefits of doing this kind of analysis and making your business more climate resilient.
SUE NEWTON: Great. Thank you. To finish off, could we have a piece of advice, I guess from each of you, if you were to focus on either one or a couple of things that you would advise businesses to be doing, as we head into 2026, practical measures they can take? Jenny, have you got a view on that, please?
JENNIFER BONNER: Yeah, sure. So, I would just really support what Moiz has just said in terms of the requirements for disclosures. And just to really think about it as more than a tick box exercise, just to think that you're really going to equip yourself with the knowledge to make strategic business decisions in the face of climate change.
So, the landscape, as Moiz outlined, is quite overwhelming, and it's changing at the moment, and it can seem quite confusing, but just to encourage businesses to engage in the process because it will be beneficial overall. You'll be more informed on your material risks, so you'll be able to build that resilience and you'll have less exposure through loss or increasing costs. And fundamentally, it will enable businesses to really have that competitive advantage and keep that reputational advantage as well, both to sustain it, but also thinking about their performance over peers, etc. if others are slower to act.
And I guess some tangible actions would be to just go back to what I said before and reflecting on past experiences of weather volatility, thinking about how did that impact your business financially, can you break that down into component parts and then look to see how this is projected to change under future climate horizons and scenarios, because understanding that exposure and your current vulnerability will help inform investment in adaptation and mitigation to meet your more resilient in the long term.
SUE NEWTON: That's great. Thanks. And Moiz, last piece of advice from you.
MOIZ BOHRA: Sure. I think, obviously agreeing with everything Jenny said, I'd just like to add that, especially for companies in the food and beverage sector, it's really crucial to start engaging with your supply chain. We see a lot of climate risk, obviously through agricultural commodities and how they might shift in terms of crop suitability in the future, changing weather patterns, etc., can really drive-up costs if companies aren't careful about sourcing and procurement in a very strategic way.
So, if you've not begun that yet, just mapping your supply chain, understanding where obviously your biggest spend might be, but also where your most critical spend might be. You might be purchasing only a couple of million pounds worth of a very specialist, specific product that, if that supplier goes offline in a climate event, might just stop you from making your product entirely.
And so having that supply chain mapping, which is obviously already part of risk management processes that companies do, but then making those explicit links with climate change and how those risks might change in the future is really important because that's how you can then start building resilience through the supply chain as well, which will obviously have advantages for your own business.
SUE NEWTON: Thank you. Thanks very much. So that brings us to the end of today's podcast. Thanks, Jenny and Moiz, for your insights and to you for joining us today. If you enjoyed today's discussion, please subscribe, rate, and share this podcast. Thank you and goodbye.
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