FAB Future Global Risks FAB Future Global Risks

Navigating New Forms of Volatility

The impact of the COVID-19 pandemic has demonstrated with clarity and certainty that the world is more volatile and interconnected than ever before. How organizations approach and elevate risk management today will help them build resilience for tomorrow. In this paper, we will be exploring industry-specific findings from our 2021 Global Risk Management Survey, including the Top 10 Food, Agribusiness and Beverage (FAB) industry risks, an inter- connected mix of established and well understood risks, as well as newer, evolving and emerging risks. What our research also continues to show is that a failure – or unwillingness – to prepare can be catastrophic to an organization’s reputation and survival. COVID-19 is a stark reminder that it is not enough to focus on a specific event or exposure, but on the impact events can carry in a globally connected marketplace. The UN predicts that the world population will reach 10 billion by 20501. This exponential growth puts unprecedented pressure on the FAB sector to ensure the industry will have the capacity to feed the world. Climate change and the resulting extreme weather and disruption that it drives are increasingly challenging the industry. As costs rise and margins shrink, the pressure is on to minimize waste, employ resources efficiently and improve environmental sustainability credentials too.

Future Global Risks in the Food, Agribusiness and Beverage Sector

Top 10 Risks in the Food, Agribusiness & Beverage Industry

Explore the Findings

Navigating New Forms of Volatility

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The world is more volatile and interconnected than ever before

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EMEA Leader Ciara Jackson ciara.jackson@aon.ie

North America Leader Tami Griffin tami.griffin@aon.com

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Commodity Price Risk/Scarcity of materials

The over-arching KPI for our clients in the FAB sector is ensuring safe products are delivered on time to customers. Operational resilience and agility, supported by robust supply chains, are critical. Pre-pandemic, supply chains were complex, digital and lean. COVID-19 introduced a new level of volatility in terms of both security and safety of supply. Supply chains are at risk of multiple forms of disruption, from digital danger to weather to terrorism to geopolitics, as well as more traditional transport and logistics risks. This need for operational resilience is very much endorsed by the industry via the GRMS results, with commodity price volatility (risk #1), business interruption (risk #2) and distribution/supply chain failure (risk #3) highlighted as the Top 3 risks. Many commodities will see yield losses due to climate change, and others will face volume reductions in the face of extreme weather events. The consequential economic and financial impact is called out as economic slowdown/slow recovery (risk #4). Cyber (risk #5) often manifests as business disruption. The FAB industry is under attack from cyber-criminals, with an almost 400 percent increase in ransomware attacks over the last two years, across all industries. The past 12 months have highlighted that the FAB industry is highly susceptible to cyber-attacks and substantial ransom demands, with high-profile examples including JBS, Campari and Lion. Businesses operating in the FAB industry are also realizing that beyond data breaches, cyber risks can have a significant business interruption impact on their day-to-day operations. There has been a shift in mindset from seeing cyber risks as purely an IT issue to understanding that this is a broader problem involving people, processes and technology. Cyber is still perceived by some as a relatively ‘new risk’, and this may be part of the reason some companies have not invested in mitigating this risk. Damage to brand and reputation (risk #6) is a significant and ongoing concern for business leaders in the food, agribusiness and beverage industry. The cause of a brand and reputation crisis can vary – whether it is food safety, supply chain failure, weather, poor governance, regulatory breaches – but the impact can be devastating financially. For obvious reasons, pandemic risk has been identified as a top 10 risk. The COVID-19 pandemic is not a typical crisis that progresses linearly to a conclusion. Rather, it comes in multiple waves of infection that require organizations to pivot between reacting, responding, recovering and reshaping. It is an event driven by a host of as-yet-unknown factors and hidden interconnectivity that combine to amplify the pandemic’s impacts and ripple effects.

Organizations must tackle volatility on two fronts: Managing current issues while strengthening strategies for future growth.

FAB Companies Are Changing How They Approach Risk Management

To navigate today’s interconnected and often uninsurable risks, FAB businesses are sharpening their focus on enterprise risk management (ERM) strategies to achieve goals such as transferring risk, accessing insurance capital at favorable rates, and preparing crisis response plans to avoid business interruption More closely integrating risk, control and compliance functions is imperative to achieving long-term success. According to this year’s survey, nearly 40 percent of companies said the pandemic would accelerate their review of ERM processes, yet only 19 percent said they were willing to increase capital expenditures to improve their ERM capabilities. Moreover, only 27 percent of companies have their risks mapped, and only 31 percent have a defined risk management plan. This suggests that companies need to continue to develop an enterprise risk mindset focused on understanding and managing their corporate risks in order to increase their resilience. The industry also faces the challenge of meeting climate and carbon emission reduction goals and meeting animal welfare standards as part of its ESG strategy. What companies do and how they act is no longer confined to the boardroom. Shareholders, customers, consumers and social media are taking a greater role in steering companies as to how they should act within the wider community. Companies need to ensure that their ERM framework encompasses an appropriate ESG strategy.

The highly competitive nature of the FAB industry has driven an increased reliance on digital technology – more automation and developments in connectivity for example – that in turn has created more complex, more impactful, exposures to cyber events. Our clients are becoming increasingly concerned about intangible asset risk, such as attracting and retaining talent, customer and supplier relationships, intellectual property and innovation capability, and cyber risk.

Industry view - Food, Agribusiness & Beveragending Reputational Risk

% that have suffered a loss

49.7%

% with plan in place to deal with the risk

58.3%

Business Interruption

40.5%

74.4%

Supply Chain or Distribution Failure

34.8%

65.5%

Economic Slowdown/Slow Recovery

57%

31.1%

Cyber Attacks/Data Breach

18.7%

77.9%

Damage to Reputation/Brand

43.5%

Pandemic Risk/Health Crises

74.4%

69.8%

Increasing Competition

34.1%

43.7%

Regulatory/Legislative Changes

17.9%

39.2%

Product Liability/Recall

21.6%

77.2%

Current Risk

Commodity Price Risk/Scarcity of materials

Current Risk

Cyber Attacks/Data Breach

Economic Slowdown/Slow Recovery

Business Interruption

Pandemic Risk/Health Crises

Aon’s 2021 Global Risk Management Survey highlights how long-tail risks have become a driving factor in how leaders make better decisions to protect and grow their organizations.

The FAB sector is particularly vulnerable to the consequences of climate change, with manufacturers under pressure to integrate climate risks into their decision-making processes. This perhaps explains why regulatory and legislative changes have been ranked as a Top 10 risk. In the post-pandemic era, when governments worldwide are expected to expand their authority in the areas of public health, financial markets, climate change, taxation and technology, the global regulatory landscape for FAB businesses has become more complex and challenging. Food safety (risk #10), and the connected brand and reputation impact, are always front of mind in this sector. Consumer trust is critical in the food industry, and they expect efficiency in production and more transparency regarding how companies source, produce, package, market and deliver their products. Future risk rankings call out the continued challenge of commodity price volatility, highlight business interruption risk and the importance of operational resilience, identify the risk of the increase of technology use and cyber risk, and the possible volatility in economic performance.

Surprises in the Top 10 Risks Selected

Certain risks did not rise to the top 10 in the industry despite the potential severity of their impact on the FAB industry.

Addressing Weather and Climate Change

We believe the climate agenda will bring both risk and opportunity to the industry. Clients are increasingly looking for alternative solutions to some of the weather challenges faced in agriculture and processing. There is much activity within the industry about the importance of climate change and the broader ESG agenda. However, the results suggest that while climate change is recognized as a risk, it may not be a key strategic risk priority for certain companies, as it did not rank as a Top 10 Risk. Future access to capital and insurance may be limited, or substantially more costly, as financial institutions and insurers look to address ESG, and climate specifically, within their investment and customer portfolios. We have seen restrictions in coal and other energy sectors and tobacco and other socially objectionable products. The European markets have been much more proactive on climate initiatives than the US domestic market – but that sentiment may be shifting. Europe also has a tighter regulatory environment than the U.S. We have observed the catastrophic effects of weather events that brought thousands of dollars of losses to primary producers of commodities such as coffee, sugarcane and corn. Heavy frosts and long periodsof drought drastically reduced harvest forecasts for these producers, causing them to have unexpected losses, which directly impact the entire food chain. Commodity prices for inputs and packaging have been and will continue to be volatile - this may be the new normal. FAB companies are facing increasing pressure from investors and regulators to define their approach to climate change. With a transition to a more sustainable business, the need to identify emerging risks and link the impacts to the balance sheet have never been greater.

Attracting, Retaining and Developing Talent

Even pre-pandemic, the entire industry faced talent attraction, retention & development issues. The FAB industry is heavily reliant on in-person, manual workers across the supply chain, from farm harvest to food processing facilities and the distribution & retailing sectors. There have been serious recruitment challenges for operatives, particularly in meat and horticulture. Workforce shortages are also being felt in transport and logistics operators. We are seeing unprecedented investments in technology and the rapid digitization of the industry. While some might argue that this will eliminate jobs, we believe that best-in-class employers will invest in their workforce to develop staff into higher-paying, higher-skilled positions.

Inclusion & Diversity

The challenge of attracting, retaining and developing talent is a recurring theme in our client conversations in the FAB industry. It makes practical business sense for businesses to strive for a diverse workforce. Having a mixture of perspectives, experience and capabilities at all levels in an organization is proven to improve business results. Best-in-class organizations cater for a diverse workforce where employees are valued, and their wellbeing is protected.

To read the full Global Risk Management Survey click here

Key priorities

Understand new forms of volatility and associated interdependencies.

Build a better understanding of holistic risk management solutions that mitigate emerging threats and long tail risks.

Consider alternative forms of capital that preserve existing capital and investments.

Build a more resilient workforce by increasing employee investment in healthcare and wellbeing.

Future Focus: Spotlight on AgTech and FoodTech

Ag and Food Tech refers to the use of technology to optimize food and drink production from farm to fork across the entirety of the supply chain. This is a highly inter-connected community of innovators, investors & acquirers. Over the last 10 years, Ag & Food Tech has seen significant growth in investment with a radical transformation taking place powered by major technology innovations and developments. We were somewhat surprised that one-third of FAB companies believe that AgTech is not applicable in their business, and a further 37 percent do not have AgTech on their current agenda for growth.

Exponential Growth

Investments made in the fiscal year 2020 were estimated to top $30 billion, representing more than a 15.5 percent increase from 20192. The sector includes alternative proteins, eGrocery shopping, agricultural biotechnologies, agricultural marketplaces, supply chain infrastructure and transportation, and more. The AgTech market is forecast to continue to grow exponentially, driven by global population growth and associated productivity pressures and amplified by climate change and stakeholder expectations.

New Forms of Capital

Capital is moving towards the sector in what was historically a low growth rate industry. The financial reward for investors is perceived to be higher on the back of the growth in Ag & Food Tech - applying tech solutions to the food systems to make production more efficient and sustainable. Digital farming is no longer a differentiator at the farm gate, but a critical success factor. The advancement of technology in the industry is essential for much-needed productivity gains. We are seeing more investment from private equity, venture capital and wealthy individuals – in targeted growth areas such as plant-based proteins (Impossible Foods, Beyond Meat).

Understanding the Risk Profile

Making an AgTech M&A decision means that companies need to understand the risk profile of the target business, and identify any potential future liabilities arising from the transaction. When negotiating the terms of the deal, recognizing the intangible nature of risks such as cyber, IP and human capital is critical. The key driver of the deal is often the intellectual property, and protecting it and leveraging its intrinsic commercial value is vital. The ‘tech’ element of the business being acquired is likely to be deeply rooted in science & data models, and with this emphasis on data, cyber risk is amplified. With a growing focus on ESG and climate, it is important to demonstrate investment activity is aligned with stakeholder expectations (consumer, shareholder, investor, colleague, community).

Source: Aon’s 2021 Global Risk Management Survey

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LATAM Leader Paulo Vitor Rodrigues paulo.vitor.rodrigues@aon.com

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If you would like to discuss any aspects of these insights, or to better understand our capabilities in this area, please do not hesitate to get in contact with our team.

EMEA Leader Ciara Jackson ciara.jackson@aon.ie

North America Leader Tami Griffin tami.griffin@aon.com

Website

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