It is difficult to over-state the potential impact of climate change on the global wine sector. Recently, I was part of a panel on this topic. My task was to get a handle on how climate change is likely to impact the business side of wine. I developed an analytical framework to consider this question based on the concept of material risk. I wasn’t able to develop my ideas fully during the brief webinar, so I will do so in this space over the next two weeks.
Unpacking the Wine Product Chain
How will climate change impact the wine business? This is a hard question because the wine product chain is global and complicated and because climate impacts can be foreseen at all the product chain links.
One approach — and a good one — is therefore to develop a taxonomy of effects. Start with nurseries and vineyards (an obvious climate impact point) and move to the cellar, where water availability is key, then through logistics — getting necessary inputs into production process and the final goods to market — and then distribution, sales, and final consumption. Climate change is a factor, either directly or indirectly, at each and every stage.
This is already pretty complicated, but we need to consider direct effects, financial effects, and regulatory responses and their costs. Indirect effects and what we might think of as counter-party impacts add more complexity. No wonder the Porto Climate Chain conference featured speakers on so many elements of wine production, distribution, and sales. You can’t really address climate change and wine without taking a broad, deep perspective.
Many of the Porto participants were justifiably proud of their contribution to addressing climate change, but in my remarks I challenged them to do more. You need to own your product chain, I said, and take responsibility for whole process. If not you, who?
A Material Risk Approach
Stephen Rannekleiv of Rabobank and Robert Swaak of PwC joined me on that Porto panel and each made an important contribution. Rannekleiv, as he often does, focused on concrete steps that his bank, its clients,. and other groups were taking to address climate change issues. Swaak, who is now CEO of another big Dutch bank, ABN AMRO, made an important point about climate change risk.
Because the climate change impacts discussed above are complex and uncertain, they are properly considered business risks. Businesses confront lots of risks in their operations, some more tangible than others, and they are expected to reveal and analyze them so that investors understand the business implications.
Confession: reading what firms have to say about risk in their annual reports is one of my guilty pleasures (along with reading really really negative wine reviews). Often the risk analysis is hidden in the back pages of annual reports, almost always in fine print. But it is always there because regulators are serious about requiring businesses to reveal to investors the risks that they are taking. You cannot evaluate risks and return if you don’t know the risk.
I like to think of these risk disclosure statements as being like the fine print you are given when you get a new prescription drug. Do you worry about possible side-effects? If so, be careful about reading drug disclosure statements because it can make imagination go all out of control. Lots of bad things can happen, although the probabilities are low enough relative to the benefits to justify a drug’s regulatory approval.
Swaak’s point in Porto was not just that climate change poses risks, it was that these are material risks — risks that can affect the material operations of the firm — which is a more serious category that requires deeper consideration and fuller disclosure. Swaak hoped that that this status would encourage firms to take climate change more seriously because they would be accountable to their investors for this actions or inactions.
As the Wall Street Journal reported yesterday, the Biden administration’s Securities and Exchange Commission is poised to require the firms its regulations cover to make their climate-change disclosures more comprehensive. The era when climate change risks could be over-looked may be coming to and end.
The Risky Business of Wine
Swaak’s Porto insight made me realize that one way to assess the likely effects of climate change would be to view them through the lens of material risk. Analysis of the material risk sections of corporate annual reports is one way to learn what climate change risks businesses see ahead of them and perhaps also what they are doing to prepare for them. At the very least it is a way to see if climate change is taken seriously.
I admit that this is not deep analysis. The firms might be myopic and not see climate change risks clearly. And there may be differences in the priorities listed in the report and those reflected in their actions. Getting values, priorities, and actions aligned is a universal problem, not limited to just corporations or to climate change.
As an article in the current Economist newspaper suggests, disclosure won’t by itself solve climate problems, but the requirement is at least an incentive to move away from climate-damaging practices and investments. With this in mind, I made a quick study of four wine sector firms which I had hoped to discuss in that webinar. The four are
(1) Constellation Brands, a very large beverage alcohol company and at one time the world’s largest wine maker.
(2) Treasury Wine Estates, a firm with global interests and product chains.
(3) Tesco, the largest wine retailer and so a key product chain link.
(4) Amorim, the largest cork closure producer, known for its sustainability commitment.
What did my analysis reveal? Come back next week to find out.
Videos of the Porto Climate Change conference presentations mentioned above are available. Click on these links for presentations by Mike Veseth, Stephen Rannekleiv, and Robert Swaak.
More than 3,500 economists, including 27 Nobel laureates and every former Federal reserve chair supports carbon pricing and dividends to reduce greenhouse gas emissions. Members of the wine industry can support carbon pricing and dividend legislation by signing the wine industry climate declaration at https://www.businessclimateleaders.org/winemakers-climate-declaration
Climate change is not only a material risk as you say, but one with a very high probability, more than many of the risks that are typically disclosed. Seems like the opposite of a Black Swan event – we’ve had years of warnings and estimations of the range of possible impacts.