Water Risk as a result of climate change
Description of the risk
Water is fundamental to our business. It makes up the largest percentage of our products and is a key part of our production processes. It is also critical for our suppliers of agricultural ingredients, and for the local communities in which we operate. Maintaining high quality, reliable watersheds is not just critical for our business but also for our relationship with our communities and suppliers.
Climate change is expected to have a significant impact on watersheds around the world. According to the latest report from the Intergovernmental Panel on Climate Change (IPCC), more than half the world’s population faces water scarcity for at least one month every year and this will increase in the future.
During 2021, we conducted a detailed assessment of the potential impact of climate change on our business under two different climate scenarios (RCP4.5 and RCP8.5), including the availability (physical risk) and cost (physical and transition risk) of water by 2030 and 2040.
Our assessment indicated that climate change is not currently having a significant impact on the availability and cost of water but is likely to do so by 2030 in the climate scenarios that we considered. This a result of an increase in the level of water stress particularly in areas that we have already determined are in water-stressed areas, which we refer to as “water priority” plants or locations.
Potential Impact
- If water availability decreases due to climate change or significant water withdrawal from upstream users, it also will lead to disruption of the water supply to our operations and to communities in which we operate.
- If we use significant amounts of water from the local watershed, it may reduce the availability of water for local communities leading to community backlash.
- We have assessed that climate change will lead to a 40% increase in our baseline water costs by 2030 and 42% by 2040 under an optimistic (RCP 4.5) climate scenario; and a 45% increase by 2030/41% increase by 2040 under a pessimistic (RCP 8.5) scenario.
- In addition, we need to spend an additional €42million by 2030 and up to €78million by 2040 in one-off Capex in water infrastructure improvements.
- For our suppliers, the water risk could lead to decreased crop yield, disruption of their supply process, issues with quality of the ingredients, decreased income, while for us it would lead to increased cost of ingredients, production disruption due to not available materials or quality issues.
For more details on our water risk assessment, please see page 71 of our 2021 Integrated Annual Report (IAR).
Mitigating the risk
We perform detailed risk assessments at water-shed level (“Source Vulnerability Assessments”) for all our manufacturing sites, regularly using 3rd party experts. Based on identified water risks, we develop detailed plans for improved water management, updated annually.
Efforts to address water risks could include watershed protection and restoration, rainwater harvesting, and infrastructure improvements to provide communities with greater access to water for drinking and sanitation.
We will continue to implement water usage reduction plans, using our true cost of water methodology for water investments, and maintain certification for our plants under the Alliance for Water Stewardship (AWS) programme. AWS requires certified businesses to use as little water as possible, and to reduce water consumption where possible across the entire value chain.
ESG risks in our supply chain
Description of the risk
There is an increasing demand for transparency in environmental, social and governance (ESG) performance as the potential impact of climate change becomes clearer and companies are increasingly held accountable to contribute to reducing the drivers of climate change. In addition, there are rightly expectations that companies identify and take action to ensure human rights, including appropriate working conditions and living wages, are respected and implemented throughout their value chains. These increasing demands are also being reflected in new regulations and directives such as the EU Mandatory Due Diligence regime and the revised GRI Universal Standards that we need to comply with.
While we have established clear expectations and goals for our own ESG performance and have a good understanding of ESG performance in our larger suppliers, we may increasingly be held responsible for the actions or lack of compliance of suppliers deeper in our supply chain where we currently have less visibility. In addition, we are expected to use our influence in the value chain of which we are part to drive change, recognising that some may not have the same access to knowledge and resources and therefore may need assistance to meet our and other stakeholders expectations.
Potential Impact
- We could be held responsible for suppliers involved in incidents of non-compliance which can lead to reputation risks, and fines as well as additional costs in finding alternative suppliers.
- Additional due diligence requires additional management time and effort increasing our costs.
- We may also have difficulty accessing ingredients that are impacted by climate change or we may have to pay more for those ingredients.
- We may not meet our stated sustainability goals by 2025, and future sustainability goals as it relates to ingredient sourcing and climate change
Mitigating the risk
To ensure that we are able to meet increasing stakeholder and regulatory expectations, we will continue to build our relationships with suppliers through initiatives such as our supplier sustainability forums as well as greater engagement to ensure more sustainable sourcing (e.g. training, joint initiatives, joint sustainable goal setting etc.).
We have been making improvements to requirements for our suppliers, significantly strengthening the human rights, ethics and compliance practices we expect. Our buyers were retrained during the year on the sustainability risk assessment tools available for supplier selection and governance.
We will expand the use of the EcoVardis system to support our supplier ESG performance assessments for better, more objective supplier monitoring going forward and leverage our EcoVadis partnership across the Coca-Cola System to improve information sharing between bottlers. This will increase our visibility deeper into our supply chain.
As part of our climate risk assessment process, in consultation with our suppliers, we are conducting deeper assessments into the potential impact of climate change on our suppliers and the implications for our business. The impact on the cost and availability of ingredients has been identified as one of four Physical Risks we assess and monitor under our climate change risk program.
We will continue working with our suppliers to support them in setting and delivering on their sustainability goals, including setting science-based carbon reduction targets.