It’s a tricky time for the meat industry. Global sales are expected to top $1 trillion by 2025, but companies face some huge challenges: shifting consumer behavior; supply chain issues; and wild swings in commodity pricing, to name a few. Yet, there is one fundamental financial risk it faces that it — if it decides to — can manage: water risk.
Ceres and our partners recently conducted an analysis that found by spending just over 1 percent of their revenue annually — or less if they worked together — meat companies could eliminate water impacts from their operations and supply chains.
Ceres looked at six meat companies and what specific water impacts they were creating in their value chains and the resulting water risks they were exposed to considering business operations, geography and water needs. We calculated the cost to mitigate the negative impacts of water practices within their own value chain and the potential change in valuation. Depending on the company in question, eliminating these impacts could cost companies and investors anywhere from $57 million to $301 million annually, impacting earnings before interest, taxes, depreciation and amortization (EBITDA) by between minus-4.7 percent and minus-7.5 percent.
1% of annual revenue seems a reasonable price to pay to protect the company’s valuation and future.
The study shows how meat companies’ existing water management practices are exacerbating their water risk — and how the cost of taking the actions needed to mitigate these impacts might be lower than expected. Changing fundamental business practices in meat packaging such as eliminating polluted runoff, reducing wastewater discharges and limiting withdrawals are typically viewed as prohibitively expensive by companies — but the cost of inaction could be five times that cost, according to CDP estimates. All told, 1 percent of annual revenue seems a reasonable price to pay to protect the company’s valuation and future.
The water risks created by company practices are very real for meat companies. Grain for feed requires irrigation, fertilizer, herbicides and pesticides and land conversion, which can mean large extractions of water and the generation of runoff filled with nutrients and chemicals. Raising livestock entails providing animals with water, grazing land and managing manure. Which when managed poorly may result in overgrazed land, high water usage, runoff containing nutrients and pharmaceuticals and manure leakage.
These unsustainable practices lead to overgrowth of surface algae, water stress and toxicity of water resources, which can result in material implications for companies including increased grain costs, expenditures for alternative water supplies, litigation over negative environmental impacts and possibly the loss of operating licenses.
Given the risks of water-related impacts and the meat sector’s comparatively low costs to remedy them, it should be taking action now. But despite commitments and targets from meat companies, most are still not meeting the mark to mitigate their water risks.
Companies should take action to address the impacts their corporate practices have on water across their value chain. The first strategic step is for companies to understand where exactly the water impacts lie — by measuring water use and pollutant discharges in both the supply chain and direct operations — and assessing the state of the local water conditions. Unfortunately, most companies are failing to even clear that bar.
Some companies are starting to change their practices. Tyson Foods has moved beyond conducting water risk assessments in just their direct operations to include owned operations, and Smithfield Foods offers educational programs and indirect incentives for their producers to conserve water for over half of its suppliers. But most of the meat sector is lagging in addressing its water risk.
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Right now, companies and their investors are significantly underestimating the widespread physical, regulatory and reputational danger their own practices are creating and may be exposed to higher-than-expected losses.
The disconnect here is clear. Meat companies need to engage with water beyond the levels they have reached in the past to fully address this growing problem.
March 22, 2022 at 02:18PM