Weeding Risk: Financial Impacts of Climate Change and Water Scarcity on Asia’s Food and Beverage Sector

This report identifies the potential financial impacts arising from climate change and water scarcity on the publicly listed companies in the USD1 $40 billion food and beverage (F&B) sector in South and Southeast Asia. It focuses on domestic companies that process and package foods and non-alcoholic beverages in India, Indonesia, Malaysia, Philippines, Thailand, and Vietnam.

The report examines the potential impact of climate change and water scarcity on three key value drivers (agricultural inputs, operating efficiency, and reputation) for each of the seven most important F&B subsectors — aquaculture, beverages, confectionary, dairy/poultry, edible oils, starches, and sugar.

This report offers a road map for analysts and investors seeking to factor environmental trends and their potential financial impacts into their assessments of companies’ strategic positioning in this sector and region.

In a case study, HSBC examines the financial implications of climate change and water scarcity on an Indian sugar company, Balrampur Chini Mills.

Key Findings

This report draws on consultations with experts and the best available literature to assess the financial implications of climate change and water scarcity on the F&B sector in South and Southeast Asia. Our analysis and findings focus on three commonly-accepted value drivers: agricultural inputs, operating efficiency, and reputation.

The most financially material impacts of climate change and water scarcity on the F&B sector are increased agricultural input prices and increased processing costs.

• The impact of climate change and water scarcity on agricultural input prices and processing costs affects all F&B subsectors examined in this report.

• The significance of the impact depends on a number of factors, including location of suppliers and factories, ability to pass costs onto consumers and the sustainability of supplier cultivation practices.

Climate change and water scarcity can raise agricultural commodity prices and increase price volatility by decreasing yields.

• Climate change and water scarcity can have a direct impact on the availability, quality and price of key food commodity inputs by negatively impacting animal and crop yields.

• Food commodity prices are particularly vulnerable to the shocks of unpredictable extreme weather events, while animal yields are most at risk from increased water temperatures (aquaculture) and access to clean water supplies.

Climate change and water scarcity can increase processing costs through operational disruptions and treatment costs.

• Water scarcity can create operational disruptions since water is 1) a base ingredient and 2) integral to production processes. Water pollution, which contributes to scarcity, requires investments in filtration technology.

• Climate change can create operational disruptions by damaging manufacturing plants and infrastructure.

Climate change and water scarcity can create food safety and stakeholder challenges.

• Climate change and scarcity of clean water can increase exposure to diseases and contamination, especially for animal-based products, increasing food safety risks.

• Competition for water is a source of tension between food processors and stakeholders, creating reputational risks.