SUSTAINABLE INSIGHT

Water Risk in the Agricultural Supply Chain

Tue 23 Jun, 2020 - 7:01 AM ET

Agribusiness is highly dependent on water, with 70% of the world’s freshwater supplies used in agricultural production. Climate change (leading to changes in precipitation, flooding and extreme weather events) presents challenges to the industry’s water access, while economic and demographic shifts are likely to increase competition between domestic and industrial users. Under Fitch Ratings’ ESG Relevance Score (ESG.RS) framework, Water and Wastewater Management (EWT) is one of the environmental factors that informs the credit evaluation of corporates with exposure to these risks. As governments and investors focus more resources on water risk management, we evaluate how these trends can affect commercial agricultural producers and processors. In the short-term, we believe that economic and regulatory trends related to water scarcity will be the most relevant to the agribusiness sector. Primary Producers Are the Most Exposed to Physical Risk Corporates involved in the agricultural supply chain will experience the impact of climate change in two main areas: in changes to yield and output, and in changes to water pricing and access. How much these factors will affect long-term financial performance depends on the company’s location in the supply chain, its geographical location and the type of crops it produces, trades or consumes. Climate change is the main cause of changes in precipitation patterns and the frequency of droughts and severe weather events. However, it also has the longest time horizon, with its impact becoming more pronounced in the next 10 to 30 years.

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