The competition for fresh food continues to put downward pressure on the sector’s supply chain. Directors across this very broad supply chain need to ask the right questions, at the right time, and ensure adequate and appropriate resources are allocated to address the risks. This will help ensure that organisations in the value chain prepare for the inevitable climate-related impacts that will challenge our fresh food supply, protecting consumers, their brands, and reputations. Danone and Fonterra are cited as leaders in this area.
Why climate risks and food safety?
The physical risks only tell part of the story of the challenge that climate change poses to the value chain for fresh food. For example, increased incidences of mycotoxins and higher risks of cold chain discontinuity and failures. What we know about climate-related risks in Australia is that there will be more extreme weather events (for example, cyclones, floods, droughts) and a range of knock-on effects[i]. It also means that the seasons when we can be guaranteed of a good return are becoming less frequent and more erratic, temperatures are getting hotter, drought has become business as usual, and water is now scarce. Our cold chains can be rendered useless in minutes during extreme weather events, and can then remain in outage for several months.
This article reviews the main categories of risk and governance issues related to climate change and how these relate to food safety. Science tells us that there are climate-related risks already impacting the fresh food supply chain2. This raises key questions that should be considered by board directors in the fresh food sector:
- Is there a problem with climate change impacting fresh food safety?
- What is the size of the impact of climate change on the fresh food supply chain in Australia?
- Is the fresh food sector in particular any more vulnerable to climate change impacts than any other sector in Australian agriculture?
These questions are relevant to those employed directly or indirectly across the fresh food sector — and ultimately to consumers.
The new technologies, practices and policies required to manage climate-related risk can also open up opportunities to reduce costs, improve product quality (and value) and change business models. For example, shelf life can be extended, labour productivity improved, risk of equipment failure (and loss of production) reduced, dependence on increasingly expensive gas reduced, and improved work health and safety performance. The Taskforce for Climate Related Financial Disclosures model or TCFD emphasises both risk and opportunity for good reason.
The remainder of this article shares insights into the following areas of board governance:
- Framing climate change issues for non-executive directors.
- Understanding the questions that board directors should be asking in relation to climate change.
- Considering other governance issues.
Framing climate change issues for non-executive directors and the board
Specific to climate-related risks, I point out the following three examples which reflect recent changes that have occurred.
Example 1. The Australian Accounting Standards Board (AASB) and the Auditing Assurance Standards Board (AuASB) quietly updated its financial reporting requirements, expanding them to capture material financial impacts of climate risks in the financial reports of entities reporting under its jurisdiction in late 20183.
These are voluntary guidelines that provide the financial reporting profession advice as to how to consider material financial impacts from climate change on an entity’s financials. These have adopted the principles set out in standards that are now appearing internationally including the TCFD or Task Force for Climate-related Financial Disclosures4, as well as the initiatives of investor groups.
While voluntary in Australia, internationally the TCFD recommendations are becoming integrated into black letter law. Many companies are now reporting against them including those in agriculture and the fresh food value chain (see ‘Public Disclosure section’).
Example 2. The ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations 4th Edition (published in February 2019). These are guidelines that Australian Stock Exchange (ASX) listed entities are required to comply to. These principles state:
‘One particular source of environmental risk relates to climate change. This includes: 1. risks related to the transition to a lower-carbon economy, including policy and legal risks, technology risk, market risk and reputation risk; and 2. physical risks, such as changes in water availability, sourcing, and quality; food security; and extreme temperature changes affecting an organisation’s premises, operations, supply chains, transport needs, and employee safety. The [ASX] Council would encourage entities to consider whether they have a material exposure to climate change risk by reference to the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (“TCFD”) and, if they do, to consider making the disclosures recommended by the TCFD.’
It is important to note that the Council takes an ‘If not, why not approach’ to reporting disclosures on all of its reporting requirements.
Example 3. The Australian Prudential Regulation Authority (APRA), the Reserve Bank of Australia (RBA) and Australian Securities and Investments Commission (ASIC) have all released statements and positions on climate related risks. Companies in the fresh food value chain will be keeping a watching brief on all of these regulators5 now that they have signaled their concerns to the market. The following quote from RBA is important. It shows an expectation that companies should look at modelling different scenarios and time horizons to explore potential implications, not just ‘document static metrics’. This implies sophisticated analysis of climate risks.
‘Financial entities should consider their need to be able to model the potential impact of CCR [Climate Change Resilience] risks under different scenarios and over different time horizons, beyond mere documentation of static metrics. It is incumbent on both APRA and its regulated entities to consider CCR risks, and put in place actions to mitigate those that could have a significant financial impact if left unaddressed’
Understand the questions that board directors should be asking in relation to climate change
The overarching questions in relation to the board, non-executive directors and risk are:
- Does our organisation’s approach to risk management demonstrate care and due diligence for the type and size of organisation that we as directors are governing?
- Does our approach to risk management create value or is it a tick and flick exercise?
Boards typically consider all risks under the broad categories of operational, financial, and strategic risk categories. Directors need to consider the broader questions as they relate to food safety but the above are a good start.
Considering other voluntary issues
There are other governance issues arising from climate change impacts on fresh food safety in the short to medium term. Some of these are highlighted in this section.
Unless your organisation is creating new value in the supply chain as a result of the pending and predicted impacts of climate change, then your value is likely to decrease or even be destroyed by more competitive disrupters.
Public disclosures yield mixed reports
Overall, the early aggregated TCFD results for agribusiness suggests boards and directors in the agricultural and food sector have work to do to prepare for pending impacts of climate change on their business models. Agricultural and food firms are making little or no headway in terms of disclosures on board oversight and resilience of their strategies in relation to climate-related risks under the TCFD. For example, board oversight of climate risks (in the agriculture and food production sector) has increased slightly by +2 per cent over the past three years since the first corporate reporting against the TCFD requirements, that is, during the 2016–18 reporting period. Over the same reporting period, resilience to climate risks has decreased slightly (-1 per cent). Agriculture and food production reporting entities have performed well on the other hand in the areas of impact on the organisation (+15 per cent) and climate related metrics (+14 per cent)5.
One of the best examples of disclosures in the fresh food sector is from Danone6. Danone have not only considered carbon impacts and increased global temperatures in their scenario planning, their future business scenarios also include water scarcity — a critical input for fresh food production.
Supply chain and third-party assurance — your weakest links
It is critical for boards to have an understanding and appreciation of the critical handoffs and handovers in their company’s supply chains, know where the delays can and do occur, where product is left out of the cold chain (or likely to be), and what the risk appetite is of their supply chain partners with respect to climate-related risks, product safety and supply chain integrity.
Unless your organisation is creating new value in the supply chain as a result of the pending and predicted impacts of climate change, then your value is likely to decrease or even be destroyed by more competitive disrupters. Fonterra is a leading example of how, through necessity, a company supplying fresh milk used technology to ensure produce temperatures were being kept at required temperatures during transport, maintaining food safety and keeping refrigeration costs low7.
The first step is understanding the actual risks and those that are emerging. Asking about climate risk and food safety, should assist in getting board attention onto the material matters for considering the risks, proposals for remedies, and capturing added value.
Other issues raised:
- Legal requirements for food safety are likely to become more stringent as climate-related impacts further manifest, as will the requirements for real time monitoring of food safety causal factors.
- Boards and their directors need to understand there are controls for food safety risks in their organisations and how effective these are, and that systems are in place to ensure legal compliance.
- Amidst the downside risk, climate change affords an opportunity for businesses to create new value by considering how climate change will impact your business model. How Danone and Fonterra are responding are good examples.