Climate Change Risks: Reading Between the Wines

March 23, 2021 By Mike Veseth in climate change, wine, wine markets 3 Comments

Climate change is a threat to the global wine industry — there is not much disagreement about this fact. But what are the specific risks to the wine product chain and what are wine businesses doing about them?

Climate Change Risk: Timely Idea?

This is a complicated question if only because the wine product chain has so many links that are vulnerable to climate change’s direct and indirect effects. One way to begin to answer the question, I proposed in last week’s Wine Economist column, is to focus on the concept of material risk. Climate change is not just an abstract threat to wine, it poses a threat to the material operations of wine firms, which are required, therefore, to disclose and analyze them for the benefit of current and potential investors.

I didn’t come up with this idea myself. As I noted last week, I was inspired by Robert Swaak’s comments at the Porto Climate Change and Wine summit. And I was interested to see climate change and material risk featured in articles in both the Wall Street Journal and the Economist newspaper reporting on Biden administration investment disclosure policy.

And now the Financial Times reports that the European Central Bank is undertaking a climate change stress test to determine the risks that European banks need to take into account in their operations. Climate change risk (and the use of risk disclosure to stimulate action) is an idea that is in the air just now. Let’s see what we can learn from it.

I’ve chosen four quite different firms in different parts of the wine business to discuss here. This analysis is not especially deep or sophisticated, but hopefully it tells us something about how these businesses think about climate change and perhaps how wine businesses in general see these risks.

Constellation Brands

I start with Constellation Brands because it is a very large publicly-traded company, which therefore has many investors who will look closely at its analysis of risk. Constellation is an important wine and spirits producer, but it derives much of its income from Mexican beer imports and has cannabis interests, too, and each business is subject to a number of significant risks. Constellation identifies four categories of risk: operational risk, strategic risk, financial risk, and “other risks,” which includes risk stemming from the fact that the company has a dual share class structure and is effectively controlled by the Sands family.

Seven pages of the report are devoted to the operational risks (pandemics are risk #1 in the 2020 report) and each risk receives relatively detailed analysis. Climate change is next to last on the list, with discussion focusing on risks to wine supply (through the impact of climate change on vineyard production, for example), and the potential costs of environmental regulatory compliance.

My key take-away form the Constellation annual report is perspective. Climate change is a business risk and environmental advocates would like it to be the top priority. But, in practice, there are a great many risks and, although climate change is taken seriously, it must necessarily compete with other risks for attention and resources.

Treasury Wine Estates

Treasury Wine Estates is a large multinational wine business with substantial assets in Australia and the United States and key markets in China, the UK, the US and around the world. Its Penfolds brand is iconic. It published both a summary Annual Report in 2020 and a supplementary Sustainability Report, so clearly the importance of environmental issues isrecognized. I focused on the main annual report for this summary.

TWE’s annual report identifies 12 categories of material risk. Changing geopolitical risks is #7 on the list, but I suspect that it is close to the top of the minds of the company’s leaders right now. Political friction between China and TWE’s home country Australia resulted in high Chinese “anti-dumping” tariffs on Aussie wine imports and the collapse of TWE’s #1 export market. Treasury is working on a re-structuring plan and shifting focus, at least for now, to other export markets. That, my friends, is an example of how a seemingly low-probability material risk can strike suddenly and with major impact.

Climate is listed as the #1 material risk, which is described as

The impacts of climate change may lead to adverse effects on business operations and performance.
Restrictions on access to and/or an increase in the cost of water and energy, and the inability of
third-party suppliers to adapt to and mitigate against climate change, could impact on TWE’s ability to effectively source grapes and wine for production.

In addition, governmental actions to reduce the impacts of climate change, for example packaging
waste and emission reduction targets may also impact TWE’s cost base.

The report lists a number of mitigation strategies. Treasury’s report suggests that its management recognizes both the direct and indirect impacts of climate on their business and, like Constellation, also anticipate changing regulatory environments as governments address climate change issues. Much more detail is provided in the Sustainability Report.

Tesco

Tesco, the big British supermarket chain, is an incredibly important link in the global wine product chain. Indeed, in my book Wine Wars I list its headquarters on Delamare Road in Cheshunt, Hertfordshire as the center of the wine universe if we think in terms of retail sales. But wine is just one of many products and services that Tesco sells.

The annual report presents what it describes as “a robust approach to risk, ” with a long list of risks, each assessed according to movement (increasing, decreasing risk) and key controls and mitigating factors. Going through the list, I began to worry when I didn’t see a category for climate change. Then I turned to page 20 and discovered that climate is so important to Tesco that it has its own special risk task force.

In addition to general climate risks, Tesco seems to be undertaking specific studies of key product categories and risk areas, which makes sense. Wine is not one of the focus areas in the current report, but it is interesting to look closely at what’s there. Some UK stores and distribution centers, for example, are at risk from flooding due to climate change. And supplies of produce from outside the UK are threatened by climate effects in the countries of origin. South Africa, Egypt, Spain, and Peru are noted as particular concerns.

The supply chains for protein (beef, chicken, etc.) are concerns, too. But there are also demand-side impacts. Tesco expects that climate concerns will shift consumers to plant-based proteins that have less environmental impact than animal-based foods, so building those supply chains and anticipating demand is on the agenda. Very interesting.

Amorim

My final case study is Amorim, the world’s largest producer of cork closures. Amorim is well known for its commitment to sustainability, so I was sure that climate change would factor into its business plan.

Amorim categorizes its business risks as short-term and long-term potential threats. In the short time frame, anything that can affect its two main markets — the world wine industry and the construction sector — will have major impact on the business. The list of things that Amorim must worry about is thus nearly endless.

Long run risks include foreign exchange shifts, competition from alternative closures, and of course the environment. The cork forests in Southern Europe and Northern Africa that supply Amorin’s raw materials are environmentally significant for their ability to take carbon out of the system and lock it away. As climate concerns intensify, the report suggests, the value of the forests for this purpose will grow.

But, ironically, the cork forests that help mitigate climate change are also threatened by it, which gives the need to address climate issues a particular urgency both for Amorim and, I think, for wine more generally.

More Questions than Answers

The question is what are the climate change risks to the wine industry and how are wine businesses responding. Inevitably this brief study has uncovered more questions than answers, in part because of its inherent limitations. I’ve looked at just four firms, examined their material climate change risks through the lens of annual reports, and of course only had space for fairly superficial summaries here.

Critical readers would have been suspicious of definitive answers or broad conclusions in the context of these limitations. That said, the actual complexity of the problem starts to show through as you read the reports. And the urgency shows through, too.

Given the Biden administration’s new SEC climate change material risk emphasis and the ECB’s climate change stress test program, I think we can expect climate disclosures to be taken even more seriously soon. Much too soon for a victory lap, but good news for wine and the environment nonetheless.

Climate Change and the Wine Business

March 16, 2021 By Mike Veseth in climate change, wine, wine markets 2 Comments

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.

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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.

Institute of Masters of Wine Webinar: Climate Change & Global Wine Trade

February 11, 2021 By Mike Veseth in climate change, Masters of Wine, Shameless Self-Promotion, wine Leave a comment

The Institute of Masters of Wine is continuing its webinar series next Wednesday February 17, 2021 with a session on “The Impact of Climate Change on the Global Wine Trade.”

The panel includes

Dr Greg Jones – Chair, Evenstad Center for Wine Education / Wine Studies
Lulie Halstead – CEO Wine Intelligence
Jane Masters MW (moderator) – view MW profile
Mike Veseth – Wine Economist, Professor emeritus of International Political Economy at the University of Puget Sound (Tacoma, Washington)

The session is open to all, but capacity is limited. Follow this link to register. You can track future webinars and view previous ones by following this link. Hope to see you on the zoom screen!

Anatomy of WineFuture 2021: Think Big

February 9, 2021 By Mike Veseth in climate change, coronavirus, economic crisis, recession, Shameless Self-Promotion, wine, wine markets Leave a comment

WineFuture 2021, an ambitious virtual wine conference, is just two weeks away and I am excited to be part of the program. The wine industry has embraced the necessary pivot from in-person events to on-line programs, so there are lots of virtual conferences these days. What makes WineFuture 2021 different?

Thinking Big

One distinguishing factor is the expansive vision of the organizers. This program thinks big, with global reach and broad societal focus. The gist of the program is this: the world is facing not one, not two, but at least four crises and the future — of wine, but not just wine — depends on what we do to address these challenges. The four crises are these.

Coronavirus Pandemic Crisis. The global health crisis comes first if only because it is an inescapable fact of daily life today that is likely to cast a long shadow into the future.
Global Economic Crisis. The pandemic and policies to address it have pushed the global economy into crisis, which some regions suffer more than others. China seems to be recovering pretty well, for example, while Europe looks likely to slip into another recession in 2021.
Inequality and Social Justice Crisis. The health and economy crises have accentuated many serious underlying issues. Inequality and social justice problems are not new, but they, along with the political reactions and social responses to them, have captured our attention.
Climate Change Crisis. Climate change is an existential threat and no serious attempt to address other problems can afford to ignore it.

Each of these crises demands our attention. And although there is a natural desire to prioritize the crises and tackle them one at a time, it is important to consider that they are interdependent and can’t really be unstirred, to use a phrase from Tom Stoppard’s “Arcadia.” It is a dauntingly complicated situation. But that’s not a reason to ignore complications and uncertainties. It is a reason to try to unravel the threads to increase understanding so that effective action is possible. That’s what WineFuture 2021 is about.

Beyond Davos Man

Looking through the many sessions and keynote talks it occurs to me that this is the sort of ambitious agenda that I normally associate with the World Economic Forum, that insanely expensive gathering of the global elite that takes place every winter in Davos, Switzerland (except this year, of course, because of the pandemic). What’s different about WineFuture 2021 is that it focuses on the wine industry, of course, and is open to a much broader audience and pressing practical concerns. “Davos Man” has become a derogatory synonym for a certain insulated attitude toward the world and its problems. I don’t see much evidence of Davos Man at WineFuture 2021 … and that’s a good thing.

So what is it about wine that provokes ambitious projects like this? I pondered this question a couple of years ago at the equally ambitious Porto Climate Change Leadership Conference. Maybe it is because wine is an agriculture product, and so rooted in nature in a way that finance capital and some manufactured goods are not? Maybe it is because so many of the largest and most important wine firms are family businesses, which bring a generational perspective to their thinking. Maybe it is wine’s special ability to bring people together — especially thoughtful people like Adrian Bridge, who was instrumental to the Porto project, and Pancho Campo and David Furer, who are the organizing forces for WineFuture 2021.

And then there’s this. WineFuture 2021 will benefit three non-profit initiatives, with funds from the program plus an auction of items donated by speakers going to the charitable causes. The non-profits are SOS Cape Town, which works to address water issues in South Africa, The Porto Protocol, which promotes sustainability in wine, and North Bay Jobs with Justice, which supports initiatives to improve worker conditions in California.

Unfolding Wine’s Future

The four day conference begins with analysis of the challenges, then dives deep into particular areas of concern, focusing on workable solutions, before gazing ahead to the future. Here is how the first day unfolds.

Francis Ford Coppola opens the show — and with his experience in film I know he will do this in dramatic fashion. Coppola is famous for his cinema work, of course, but also for his important efforts in wine and for the values that guide his many and varied efforts. The first formal panel, moderated by the wine industry’s most famous MD — Laura Catena — will address the inescapable topic of the health crisis.

The second panel examines at the economic crisis. I’m speaker and moderator and am delighted to have Rabobank’s Stephen Rannekleiv, South Africa’s Carina Gous, and Professor Eugenio Pomarici of the University of Padova join me for this discussion. Together we plan to break down the economic impacts and reactions in ways that generate useful insights. We are followed by important panels on reviewing and reversing discrimination, how to deal with the unexpected, and then a keynote by UNESCO Director General Irina Bokova.

The program on days 2, 3, and 4 follow with more important programing by global leaders and wine industry luminaries including keynote talks by Pancho Campo, UNWTO Executive Director Manuel Butler, and OIV Director General Pau Roca. Click here for a list of all the speakers and here for the complete program.

WineFuture 2021 is kind of a big deal. It thinks big, acts big, and seeks to set a high standard for the wine industry as we move into the future. I am proud of the wine industry for its support of and commitment to big ideas and big initiatives like this one.

Wine Future 2021, Idaho Wine, The Unified: Wine Economist World Tour

January 5, 2021 By Mike Veseth in climate change, coronavirus, economic crisis, globalization, recession, Shameless Self-Promotion, Unified Wine & Grape Symposium, wine, wine markets Leave a comment

The Wine Economist World Tour is back on the virtual road in 2021. We hope for the return of in-person events before too long, but until that’s possible virtual events will do very well. Here are the first three stops for the new year.

The Unified: State of the Industry

The Unified Wine & Grape Symposium (January 26-29, 2021) is going virtual this year, including both the seminars and the amazing trade show. It will be quite an experience.

The program addresses a host of important issues, with special attention to wildfire threats and diversity and inclusion initiatives. Several sessions analyze changing wine market conditions including the State of the Industry session on Wednesday, January 27. Danny Brager, Glenn Proctor, Jeff Bitter, and Jon Moramarco join me on the virtual panel.

Idaho Wine Commission: State of the Industry

The Idaho Wine Commission’s annual meeting goes virtual this year, too, with half-day sessions on February 22-23, 2021. This is the third time I’ve spoken at this event and I am sad that I won’t be able to visit Boise in person to refresh friendships, exchange insights, sample great Idaho wine, and enjoy Boise’s amazing Basque food scene.

I will anchor the first day’s program with a special take on the State of the Industry. Greg Jones, the world’s foremost viticultural climatologist, will speak the following day. Economic change, climate change. Food for thought for Idaho’s dynamic wine industry.

Wine Future 2021: Challenges & Solutions

WineFuture 2021, an incredibly ambitious international event, will happen on February 23-26, 2021. This big international conference boasts an all-star cast. I will lead a panel on the economics of the crisis on February 23.

The folks behind Wine Future 2021 think big. The theme of the first day is the four crisis challenges facing wine (and the world): climate, economy, pandemic, and inequality. Day 2 focuses on solutions and sources of inspiration. The final two days look to the future from many different points of view.

Wine Future 2021 has been hosting a pre-conference webinar series since November to get ideas in the air and discussion flowing. You can view previous webinars (including one I did with Rabobank’s Stephen Rannekleiv) and register for upcoming broadcasts on the Wine Future 2021 Webinar home page.

It’s Going to be Huge: 2020 Unified Wine & Grape Symposium

January 21, 2020 By Mike Veseth in climate change, trade wars, Unified Wine & Grape Symposium, wine, wine markets 2 Comments

The Unified Wine & Grape Symposium is just a few weeks away (February 4-6 in Sacramento) and I am already excited. The Unified is North America’s largest wine industry event with about 14,000 in attendance for the trade show and seminars.

Bursting at the Seams

The 2020 Unified promises to be bigger and maybe even betterthan ever before. The event has been moved out to the Cal Expo fairgrounds for 2020 while the Sacramento Convention Center is expanded and remodeled — the Unified simply outgrew the old facilities. The one-year move means even more room than in the past for trade show exhibitors, including outdoor space for big machines and equipment. It’s going to be huge — literally!

And the program organizers have gone to some trouble to expand seminar offerings, too, with 110 speakers divided among about 30 sessions. Something for every need and interest with programs for growers and winemakers, marketing and business management. As has been the case for several years, some of the technical sessions are offered in both English and Spanish.

Labor cost and availability is an important issue in the wine business, so I am interested in one session that examines mechanization in the vineyard and includes a wine tasting. I’m guessing that the audience will be offered the opportunity to see if they can taste the difference between wines made with machine-harvested versus hand-picked grapes. Should be interesting.

State of the Industry

I’ll be moderating and speaking at the “State of the Industry general session on Wednesday morning. Danny Brager (Nielsen), Steve Fredricks (Turrentine Brokerage), Jean-Marie Cardebot (University of Bordeaux), and Jeff Bitter (Allied Grape Growers) will be joining me on the big stage. A great team with deep understanding of the wine market.

Jeff O’Neill of O’Neill Vintners and Distillers is giving the Tuesday luncheon keynote speech this year and I am looking forward to hearing what he has to say. These are uncertain times for wine in the United States and it is easy to be pessimistic about the future. O’Neill’s company has been remarkably successful in navigating the treacherous seas, taking advantage of favorable winds. Everyone will be looking for lessons and insights they can take back to their businesses.

This is important because one cloud hanging over the meetings is a structural surplus of grapes and wine in some categories. U.S. wine demand is plateauing, which is better than some countries where demand has been falling for years. Overall wine expenditures are still rising even if overall volumes have declined.

The surplus creates a problem that may take years to correct through a combination of rising sales in old markets, development of new markets, and adjusting production capacity. Heidi Scheid is leading a session that will address the issues directly titled Strategies for Managing Through Over-Supply. Should be a standing room crowd.

Trade Wars Shrink the Pie

Trade wars are another concern. President Trump has said that trade wars are good and they are easy to win, but the wine industry has found little to celebrate about being in the center of the battlefield. Having invested years of effort and lots of dollars opening up Chinese markets, for example, many wineries have watched hoped-for opportunities disappear with retaliatory Chinese tariffs on U.S. wines.

It looks like French wine producers have dodged a bullet, avoiding sky-high U.S. tariffs that were threatened as retaliation for France’s digital tax scheme. You might have expected U.S. wine producers to celebrate tariffs on wine imports because some buyers are likely to shift from imports to domestic wines. But this substitution effect is not the only impact the tariffs have.

Prohibitive tariffs on imported wine are more likely to shrink the wine market pie at every stage of the product chain. It is hard to see how retailers or distributors can justify investment in the wine category when overall sales fall and uncertainty about future conditions is high. The uncertainty effect looms especially large, despite the recent wine tariff trade truce. If wine was caught in the trade war cross-fire before, there’s no reason it couldn’t happen again. And truces are by their nature temporary and fragile.

When tariffs work to protect an industry they tend to do so only temporarily and at high cost (struggling Harley-Davidson is a good example of this). But they more often backfire. The recent tariffs meant to protect manufacturing jobs in the U.S., for example, seem to have only accelerated the decline of the manufacturing sector generally because of the complex international interweaving of manufacturing chains and other factors.

Food (and Drink) for Thought

There a lot to think about as the wine industry moves into 2020, so I encourage readers to check out the Unified’s seminar programs and start working on a strategy for the trade show.

I’ve been to a lot of wine meetings both here and abroad, but there’s nothing like the Unified. Hope to see you there.

Wine, Adapting to Climate Change, & the Peter Parker Principle

January 14, 2020 By Mike Veseth in climate change, wine 5 Comments

before The Red Mountain AVA is Washington’s smallest, warmest, and maybe its most distinctive wine-growing region. The warm part has been advantage for most of Red Mountain’s history. But not any more, according to Gaye McNutt and Benjamin Smith, owners of Cadence Winery and the Cara Mia Vineyard.

Too Darn Hot

Climate change has had a variety of effects that condition Smith’s ability to make the elegant wines he prefers. Earlier harvest, potentially higher alcohol levels, sunburned fruit, tough tannins — none of these impacts is desirable. Working with vineyard manager Dick Boushey, McNutt and Smith considered many alternatives and found each potential solution problematic in one way or another.

Then they hit upon an insight — to transform the vineyard in the image above to the emerging vineyard you see below.

after

The result is the first vineyard in Washington State specifically designed to mitigate the effects of climate change by doubling the row density of the vineyard. First planted in 2004 at three feet between vines and eight feet between rows the vineyard is now spaced at four feet between rows.

This tighter spacing provides up to two hours additional morning and afternoon shading of adjacent rows thereby cooling the fruit, reducing the effects of high heat, and ultimately producing more elegant, lower alcohol wines even in hotter vintages.

All around the world winegrowers are facing up to the challenges that climate change presents and, because wine people are creative by nature, they are finding ways to adapt through innovative viticultural techniques. Cadence is a model of how this can be done.

The Cadence solution is not inexpensive, of course, but it promises to allow them to continue to make excellent wines and even has benefits as an opportunity to add additional clonal selections to the mix.

Peter Parker Principle

A 2000 case winery like Cadence is to be commended for setting an example of innovation to mitigate the effects of climate change. Larger wineries can do the same, but the Peter Parker Principle (familiar to all Spider-Man enthusiasts) holds them to a higher standard. With great power comes great responsibility.

Many large wineries have risen to the Peter Parker challenge. Familia Torres and Jackson Family Wines, for example, have taken the lead in forming a global wine alliance to fight climate change, the International Alliance for Climate Action. Adrian Bridge of Port producer Taylor Fladgate was instrumental in creating the Porto Protocol and the global conference on climate change and wine that Sue I and attended last year.

Many wineries embrace their social and environmental responsibilities by becoming benefit corporations (B Corps for short). Certified B Corps commit to a social and environmental responsibility agenda and agree to transparent assessment of their activities. Are you familiar with B Corps? A number of large businesses have taken this step including Patagonia Works, which has a B Impact Score of 151.2 on a scale of 0-200 (the minimum score for B Corps certification is 80 — an “ordinary” business might score about 50 points). The craft beer producer New Belgium Brewing is also a B Corp (B Impact score 136.5).

It is easy to be a B Corp skeptic because it seems so unlikely that a business really would elevate people and planet to the same level as profit in its priority list. And I am sure that some are more committed than others. But a number of my former university students have become practitioners of and advocates for the B Corp program and they have persuaded me to take it seriously (Steve, Russ, Portland, Douglas, and Colleen — I’m talking about you).

Many wineries are entering the B Corp economy. Oregon’s A to Z Wineworks became the first certified winery B Corp in 2014 and is now joined by a growing international community including Symington Family Estates in Portugal and Fetzer Vineyards in Calfiornia. Fetzer, with about 2.5 million case production, is the largest B Corp winery in the world.

The Symington Family’s sustainability program, Mission 2025, is especially ambitious and includes a recently announced €1 million Impact Fund. The primary use of the funds will be for community well-being and health, environmental protection and conservation and cultural heritage and education in the Duoro and Alto Alentejo regions where the company has vineyards.

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Mapping the Road at Fetzer

Fetzer has doubled-down on the Peter Parker Principle. Fetzer and its Bonterra brand have long been known as environmental stewards and activists. Chilean leader Concha y Toro’s 2011 acquisition has given Fetzer greater scale and even deeper commitment to corporate social responsibility.

Fetzer’s 2017-2018 “Peter Parker” report, Mapping the Road, makes good reading because the range of activities and commitments is very impressive. As the report says,

Fetzer Vineyards understands that transforming the future requires not just small, incremental steps toward sustainability, but rather an ambitious framework—like regenerative development—applied to every part of its business. With the knowledge that the road will not always be easy, Fetzer Vineyards is poised to continue taking bold steps toward its vision of a regenerative, net positive company, and to be part of the movement to redefine what responsible business is all about.

One thing that I admire is that Fetzer is willing to “own” its supply chain. Many environmentally ambitious firms limit their universe of concern to their own operations, which is both practical and understandable. But wine’s supply chain is long and complex and progress in the vineyard and cellar alone is commendable, but not enough. Major players like Fetzer need to take responsibility for the whole chain. It’s the Peter Parker thing to do.

And, increasingly, they are. Congratulations to Cadence, Symington, Fetzer, and others for their leadership.

Wine Book Review: Redrawing the World Wine Map

October 15, 2019 By Mike Veseth in climate change, emerging wine regions, globalization, wine, wine markets 1 Comment

atlas Hugh Johnson and Jancis Robinson, The World Atlas of Wine 8th edition. Mitchell Beazley, 2019.

The notion that we must redraw the world wine map comes up a lot. Climate change is redrawing the map — you’ve heard this before, haven’t you? And I’ve written about how globalization is redrawing the world wine map. And money — changing consumer patterns across the globe and among generations — is changing things, too.

The Great Convergence

The idea that we must redraw the wine map is easy to talk about, but actually doing it turns out to be devilishly difficult. But that’s the task that Hugh Johnson, Jancis Robinson, and their team of expert collaborators set for themselves in the revisions that produced this 8th edition of The World Atlas of Wine. It’s quite an achievement.

Robinson discusses the challenge in her introduction to the weighty volume. A couple of decades ago it seemed like wine was on the path to global homogenization, she writes, with wine production everywhere converging on a few marketable varieties and even fewer popular styles. I think the rise of efficient international bulk wine transport put a premium on sameness — more market opportunities if your Chilean wine can seamlessly substitute for California or Australia juice.

Cool is Hot

I won’t say that the convergence has stopped, but there’s been a reaction to it that focuses on differences and highlights indigenous grape varieties and traditional wine-making styles. Climate change and scientific research have altered wine’s physical domain, pushing grapevines into unexpected places. Tasmania and England are hot, attracting lots of attention and investment, precisely because they are cool — cool-climate, that is.

It might once have been possible to think about wine in terms of old world and new world, but today’s map is more of a tapestry, with global elements interwoven with exciting local developments. How can this dynamic be captured in a wine atlas? There are a couple of obvious approaches and I think Johnson and Robinson have chosen the best and most difficult one for this book.

The Great Revision

So how do you redraw a world wine atlas? One approach I have seen to updating a big book makes heavy use of text boxes and call-outs. The bulk of the text gets a once-over-lightly revision, while the new material is patched into using the boxes. This makes the new material easy to spot and updating the book the next time is basically updating the boxes. This saves time and money, but the result is necessarily uneven if only because some topics need a lot of updating and others less so, but the editorial format often calls for equal numbers of box opportunities.

Much harder to do — so hard with a 400+ page book that it is almost crazy — is to rewrite everything taking the dynamic elements fully into account. That, of course, is what we have in this 8th edition. The changes are not always obvious because they have been seamlessly integrated, but they are there on every page.

Literally Redrawing the Map

Inevitably, this process means that the maps at the core of any atlas have to change. All 230 of them (!) have been updated as necessary and 20 new maps drawn (plus new 3-D maps and soil maps). Seven regions get their own entries for the first time: Cyprus, Lebanon, Israel, British Columbia, St. Helena (Napa Valley), Brazil, and Uruguay.

You might think the challenge of a 416-page atlas is to fill the space, but the reality is just the opposite. There’s an emphasis of economy and selectivity throughout. Each entry is a delicate balance of breadth versus depth and, while those with specialized interests may be frustrated, I think on the whole it works pretty well. That said, I’d love to see even more detail about China (which was allocated an addition page in this revision), since the wine world’s center of gravity is slowly shifting in that direction.

Bottom Line

The new 8th edition of the World Atlas of Wine is a great achievement. Highly recommended.

The Beginning of the End of the Old World Appellation System?

June 4, 2019 By Mike Veseth in climate change, EU wine market reforms, wine, wine history, wine markets 7 Comments

“Some New World regions are adopting European-style AOC rules,” the Italian journalist I met in Sardinia explained, “Do you think this is an important trend?”

“No. Just the opposite. I think the Old World appellation system is under attack and will need to change to survive.”

He looked at me like I had dropped down from Mars. This was clearly not the answer he was looking for, but I think it is true. I wasn’t able to explain my logic very well in the rush of the interview, so let me try to explain here.

We Have Met the Enemy …

New World wine appellations are geographical indicators that specify a wine’s origin and help differentiate a region’s products. Some of these designations are very valuable (Napa and Sonoma, for example) in terms of price premium. Others are of little economic value, but can sometimes be useful in other ways that I don’t have time to explain here.

The Old World appellation system starts with designation of origin and adds to that a system of rules that restrict grape choices, blend components and ratios, viticultural practices, and other factors. AOC rules can literally fill a book as Jancis Robinson shows us in the classic video above.

AOCs (and Italian DOCs, Spanish DOs, etc.) evolved as essentially protective structures based on the experience in Champagne, which was the model for the current system. (I wrote about this in my book Money, Taste, and Wine). The first goal was to protect regional reproducers from fraud by outsiders passing off their imitation wines as the real thing.

The second goal (and the reason for such detailed regulation) was to protect quality producers in the region from neighbors inside the region who might cut corners and sacrifice quality to increase profit while benefiting from the regional “brand”.

Very high yields, for example, might increase a particular winery’s profit, but the lower quality dilutes the value of the appellation to all others. It is a cut-throat situation. “We have met the enemy and he is us” describes this element of the AOC program.

So AOCs seek to defend the regional brand from threats from the unscrupulous both outside and inside the region. Today, however, there are two powerful forces that threaten this system and will force it to change. Indeed it is already changing.

Shifting Center of Gravity

The first force is the global market, where the fastest-growing segments and categories are not closely aligned with the AOC system and where the premiumization syndrome is strongest. American consumers have shifted their market’s center of gravity to higher price points, but not higher prices for the same products. They will pay more than before but the product has to be differentiated and appealing. So innovation, which is not a strong point of the AOC system, is increasingly important.

Sue and I saw this when we visited the Valpolicella region a few years ago. The AOC system basically provides opportunities for Valpolicella wines, Ripasso, and Amarone in ascending order of retail price (I am leaving out details to simply, but you get my drift).

We met producer after producer who responded to this situation by creating proprietary blends of grapes that were “downgraded” to IGT status (because the blends don’t strictly adhere to the rule book), but upgraded in terms of price because of their effective branding and high quality. These new IGT wines were designed to fit price points created by premiumization that were not easily attainable with existing AOC products.

There is nothing new about the IGT movement — remember when super-Tuscans were controversial, which feels like a very long time ago? But the IGT trend, which basically slips out of the AOC handcuffs, has gathered unstoppable momentum. We see these wines everywhere now — France, Italy, Spain, everywhere. And some of them of fantastic. AOC? We don’t need no stinkin’ AOC?

In a sense the rise of these “super-” wines represents a shift in mentality that is worth noting. If the AOC system if defensive at its core, the IGT movement is entrepreneurial, seeking out new opportunities and breaking rules to get them.

Climate Change Challenges

The AOC system can withstand these market forces, although some regions will find it in their interests to adapt as Chianti did in the face of super-Tuscan success. But a second force is harder to ignore and will be even more threatening in the long run: climate change.

AOC rules are often promoted as an evolutionary pinnacle. We’ve had hundreds of years to figure out what grapes and blends are the very best for our terroir and here they are laid out in the rule book! Best of the best. You cannot improve upon the AOC rules.

It is a nice argument, but what happens when the terroir changes due to new climate patterns? The answer is that the wines need to adapt and evolve to remain at the peak, which is hard to do if the rule book doesn’t change. AOC standards need to evolve with the climate or become irrelevant or, worse, counter-productive.

Bordeaux Adapts

Some Old World regions already see the writing on the wall, as Jane Anson reported in Decanter earlier this year. Bordeaux and Bordeaux Superieur producers now are able to experiment with “accessory grape” varieties that may better withstand climate change than the traditional (and designated) grape varieties such as Cabernet Sauvignon and Merlot.

“The red grapes for trial,” Anson reports, “will be Marselan, Syrah, Zinfandel and Arinarnoa. In white, Liliorila, Chardonnay, Petit Manseng Blanc and Chenin Blanc will be tested.” A recent VinePair article called this “a small revolution,” but I see it as something bigger and this is just the start.

Anson’s article continues,

Veronique Barthe of Chateau la Freynelle, who is working on the project with the Bordeaux and Bordeaux Superieur Union, told decanter.com this was not a form of sacrilege.

‘We are not trying to make 100% Syrah in Bordeaux, but to test which grapes work best on which terroir in the region with the intention of introducing them only if they offer real quality,’ she said.

This sounds like exactly what a winemaker should be doing, don’t you think? “When the facts change, I change my opinion. What do you do?” according to Keynes. When the climate changes, what will the AOCs do?

So the AOC system is under attack from the inside by IGT wines and from the outside by climate change. The system will adapt, but it won’t be the same. We can debate whether this is a good thing or not (I’m on the good thing side), but it is going to happen. And that’s what I wish I had time to explain to that Italian wine journalist.

Thinking Outside the Wine Box about Climate Change & the Future of Wine

April 23, 2019 By Mike Veseth in climate change, wine, wine markets 3 Comments

Miguel Torres recently warned that the wine industry is not doing enough to fight climate change and there is no doubt that he is right. There is a lot happening, as the recent Porto conference on climate change and wine makes clear. Wine is ahead of most other global industries. But it is not enough.

Inconvenient Truth

One reason climate change does not get even more attention in our industry (and I think that this is true of other sectors as well) is that we tend naturally to focus on the direct effects on our businesses, assuming that these are the most important ones to us. So climate change is seen as something to mitigate in the short term using appropriate viticultural techniques and other strategies.

In Australia, for example, there is a shift from French to Spanish and Italian wine grape varieties and investment in cooler regions including especially Tasmania. The fact that firms can adapt in this way lessens the sense of risk and urgency. Climate change is seen, to draw from the title of Al Gore’s film, an inconvenient truth. Inconvenient and sometimes expensive, but not necessarily an existential threat, especially since some elements of climate change actually benefited winegrowers in the not-too-distant past.

Taking the Heat Off

Not everyone thinks this way, of course. Torres has gone all in to combat climate change and he is not alone. But the fact that mitigation techniques exist and more are being developed tends takes the heat off the sense of urgency that might otherwise prevail.

But these direct effects of climate change are not necessarily the most important ones. In order to properly assess the climate change threat to wine we must look deeper into the future and broader to the impact on the overall economic environment in which wine is embedded.

So what does the future hold, assuming current trends continue in some form? There has been a lot of research on how changing climate will affect the viability of wine grape growing in the traditional regions. Some areas will suffer minor impacts that can be mitigated through changing viticultural practices. Other regions will remain viable, but perhaps need to re-graft vines with different grape varieties more suitable to the new conditions. Old World appellations will have to rethink many of the regulations that current define them.

Other regions will will cease to be viable for quality wine grapes – period – while elsewhere we’ll see areas in the spotlight as emerging wine regions. All this will take place in the context of increasing instability of weather patterns, which most of us have already observed.

Outside the Wine Box

All these factors are important, but I think it is necessary to think further outside the wine box. Climate change will impact all of agriculture in one way or another and a great many other industries, too. The problem of feeding the world (and earning an income in it) will not grow easier overall if trends continue. This will put a squeeze on living standards and wine, because it is far from a necessity, will be squeezed harder than some other products.

At some point, and I hope it is sooner rather than later, coordinated action to slow or potentially reverse climate change is in the cards. Economists like me have long advocated a carbon tax as part of the package. Carbon taxes exist today, but in a patchwork quilt of policies and regulations with widely varying tax rates.

Carbon Tax and Wine

A coordinated carbon tax works by raising the relative price of goods and services that contribute to climate change problems. Consumers are discouraged from purchasing them by the higher price. Producers are given an incentive to innovate products and processes that replace old systems to lessen tax burdens and climate change impacts at the same time. Economists favor a carbon tax because it creates incentives for private actors to reduce emissions whereas direct regulation creates incentives to get around the regulations (see VW diesel emissions fraud).

A well-designed broad-based carbon tax might be the best way to counter climate change. It would harness private self interest to combat climate change in a way that other solutions cannot.

If climate change will affect wine as noted above, how would the carbon tax impact the industry? Well, the modern globally-integrated wine industry has a substantial carbon footprint and a carbon tax would be a big shock. Even firms that are carbon neutral in the vineyard and cellar face the fact that the supply chain is a problem.

Take glass bottles, for example. Glass of course takes a lot of energy to make, which is an important issue, but that’s not the end of the story. The U.S. wine industry is dependent on glass bottle imports from China. The ships that carry containers full of glass bottles are significant sources of pollution. Transportation from bottling plant to warehouse to retailer to consumer adds to the carbon footprint, too.

Beer and spirits might well be less affected by a carbon tax since they can more efficiently be produced close to major markets using ingredients such as grains that can be shipped efficiently by rail. The fact that wine is mainly produced close to the agricultural source and then shipped to far away markets is a disadvantage in a carbon tax system compared with products where weight and bulk (in the form of water) can be added closer to the final consumer.

Need to Do More

I have obviously just scratched the surface here, both in terms of the broader impact of climate change on the wine industry’s economic environment and the potential impacts of policies designed to resist or reverse current trends. But I hope my point clear. The impact of climate change on your wine business goes beyond what you see in your vineyard or cellar and the cost of inaction now in terms of future consequences is likely to be pretty high.

Climate change creates losers and some winners and the policies that are eventually adopted to deal with it will be the same. It is difficult to imagine a scenario where wine will be among the winners and we can already see the negative effects. It’s time to join Miguel Torres and the Porto Protocol team who ask us all to do more.

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An earlier version of this article made referenced to a report in The Drinks Business about Richard Smart’s views about climate change and hybrid grapes. Smart disagreed with the way his views were reported and the interview was removed. Here is the explanation.