A growing concern over water is striking the heart of the $5 trillion food and agribusiness sector, according to a report by Ceres, a nonprofit focused on sustainability. The study, “Feeding Ourselves Thirsty,” analyzed 40 companies in the agricultural products, beverage, meat, and packaged food industries.

The report’s takeaway is that water volume—too little or too much—is a serious concern for food-related businesses. Of the 35 public companies evaluated, 77% mention water as a risk in their filings, compared with only 59% in 2017. The beverage subsector has been better at addressing water risks than meat, the report found. Unilever, Nestlé, and General Mills received the highest scores for voluntary corporate disclosures involving sustainability or corporate social responsibility, company responses to Carbon Disclosure Project, and other benchmarks.

Asset managers need to incorporate water risks into their evaluation of portfolio positions, according to Ken Locklin, a director at Impax Asset Management, a firm dedicated to investing in opportunities that the scarcity of natural resources create. “Large investors have an institutional responsibility within their own corporate governance to be aware of water risks and how they impact not just companies, but broader society,” said Locklin. “When water risks are not addressed, the problem can hit you sooner and harder in the short term.”

A 2019 MSCI analysis of food companies in the All Country World Index found that $415 billion in revenue may be at risk from a lack of water availability for irrigation or animal consumption. Changing precipitation patterns that affect crop production may cause an additional $248 billion to be at risk, MSCI reported.

When water risks are not properly managed, there are higher fluctuations in price for agricultural products. Inconsistent or reduced supply and loss of contracts or access to markets can also result. Regulatory compliance with federal, state, and local officials can be complex, leading to violations or litigation. For example, in 2014, agriculture used about 80% of the water in the Colorado River basin to irrigate nearly 4 million acres, providing 15% of US crop output and 13% of livestock production, according to the Environmental Defense Fund. Since then, water in the basin has been scarcer due to a chronic drought, leading to regulatory actions such as lower allotments and requirements that groundwater is pumped from wells. The goal is to prevent food operations or crop development from being affected.

Other risks are endemic. Brands can experience a loss in reputation, especially if there is public outrage over, say, an overtasked aquifer. Nestlé is facing opposition in Gilchrist County, Florida, because it is planning to pump 1.1 million gallons of water per day from Ginnie Springs in the lower Santa Fe River.

Supply chains are under pressure when water is scarce or at the mercy of extreme weather patterns. However, there are ways to manage the risk and even create opportunities for investors, such as water treatment or testing facilities.

Despite pressure from farmers and activists to support more sustainable methods, management has been tentative. The average company score for effective management of water concerns is 38 out of 100. Less than half of the companies provide financial support to encourage sustainable agricultural methods, such as efficient irrigation, low-till/no-till cover-cropping, diversified rotations, or optimized fertilizer applications. Some of the fixes are fairly simple. Improving soil quality can improve water retention and the soil’s ability to resist drought.

In 2019, flooding in the Midwest demonstrated how debilitating water hazards can be. Archer Daniels Midland estimated that disruptions from the floods reduced its first quarter, pre-tax operating profit by $50 million to $60 million. In the fourth quarter, net income dropped 10% to 12%. Shares of Tyson Foods fell 4.8% from mid-May to mid-June and shares of poultry producers Pilgrim’s Pride Corp. and Sanderson Farms Inc. fell more than 11% in the same period. The floods had caused millions of acres of corn and soybeans to remain unplanted, which drove up futures prices for livestock feed ingredients.

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Tags: Water Risk; Agriculture; MSCI; Unilever; Nestle; General Mills