Drivers of Financial Risk
For food and agribusiness companies, commodity sourcing is an increasingly challenging business function. Traditional procurement strategies for managing agricultural supply risks are becoming less effective in managing supply volatility in an era of climate change and increasingly erratic weather patterns. Widespread groundwater depletion and soil erosion are further compromising agricultural productivity and increasing procurement costs. Campaign groups are shining a light on questionable and illegal practices in supply chains, including deforestation and the use of forced labor, creating risks to brand equity and reputation.
While the severity of environment and social impacts vary by commodity and region, the collective trends are producing tangible business risks that are increasingly affecting company bottom lines. Specific financially material risks include
- Operational risks include reduced primary crop and livestock production.
- Reputation risks include damage to brand equity due to conflicts over scarce resources or environmental or social issues highlighted in advocacy campaigns.
- Regulatory risks include compliance costs due to violations of environmental or social guidelines.
- Market risks include loss of contracts or market access due to environmental or human rights impacts.
- Litigation risks include legal actions or sanctions for failure to address negative environmental or human rights impacts.
To maintain growth and profitability in this new, more challenging landscape, food companies must develop agricultural sourcing strategies that are climate resilient and fundamentally decoupled from environmental degradation and adverse human impacts.