Climate Risk as a Strategic Driver in the Food Supply Chain

Intro:
Hello and welcome to another episode of On Aon.

This week, we’re looking at the effect climate risk is having on an industry that we all need day to day — the Food Agribusiness and Beverage sector. There’s no doubt that climate change is accelerating volatility across the food system — but it’s also opening the door to smarter, more resilient ways of managing risk. Ahead of speaking at Aon events during London Climate Action Week from June 20th to the 28th, here are Aon’s Susan Doering and Liz Henderson to explore what’s changing — and how businesses can stay ahead.

Susan Doering:
Hello and welcome to this industry insight episode of On Aon. I'm Susan Doering. I'm Aon’s global leader in the food, agribusiness and beverage sector — or FAB as we like to call it because it is.

Today we're going to talk about climate volatility and how it's becoming a real major disruptor and that's a core financial risk for the food, ag and bev companies. Given our topic, no better person to have with me on today's episode than Liz Henderson, Aon's global head of Climate Risk Advisory.

Hi, Liz.

Liz Henderson:
Hi, Susan.

Susan Doering:
So Liz, today we're going to be exploring the impacts of the changing climate on the Food, Ag and Bev businesses and their balance sheets. And most importantly though, and this is always the lens I like to take on these things, what can we actually do about it? It's one we've been talking about a lot lately. So Liz, here's a great big question for you. How have you seen climate and weather risks change over, let's say, the past five to 10 years?

Liz Henderson:
That is a great big question and certainly something that is top of mind for me in my role. But actually is an issue that is top of mind for Aon's clients, not just within our fabulous FAB industry, but across every sector. We are seeing climate change really as a risk amplifier across a whole slew of different risk categories that are impacting clients, such as business interruptions supply chain disruption, obviously the impact on physical hazards and assets.

So it's continuing to be a top-of-mind challenge for our clients.

I would say specifically for this sector, weather has always been a challenge for farmers. It is core to what they deal with every single day as they're optimizing their work flows, their operations, and they're managing all of the different sources of volatility that can impact yields and prices.

I think what we're seeing now is much more frequent and extreme events that are hitting multiple regions and multiple supply chains at once. I also think that one of the changes we're seeing too is just how interconnected the world and supply chains really are.

That means that traditional ways that farmers and food off-takers have been able to manage this volatility are becoming limited.

So whether that's supply chain diversification, farming practice changes and innovations, commodity price hedging, I those are the traditional ways that this industry manages this risk that is now being challenged and reaching some of its limits because of the amplification of climate change.

This for some interesting numbers and stats. In 2025, we saw about $32 billion of agriculture loss in the European Union. And the European Scientific Advisory Board for Climate Change is projecting that to increase to nearly $50 billion a year by 2050.

So it's an area where we're seeing losses actually already increasing and expected to increase further.

We saw about $5 billion of ag losses in the United States that was driven by natural hazard and drought. And these are perils that we expect to continue to increase and become more severe as the climate changes.

Susan Doering:
So, we are absolutely seeing the same type of volatility in our day-to-day regular interactions with our FAB clients. So, like big picture stats. And then we're actually seeing this play out in real time with our clients directly. We're hearing about agricultural yield and quality reduction globally due to excessive heat and drought like you talked about. We're hearing about supply chains being disrupted due to severe weather.

The other one that's interesting that we don't talk about as much, but is a huge issue is the agricultural workforce and how their work schedules have had to be adjusted because they can't be exposed to extreme heat.

So a lot of really major challenges and all of these things are driving to higher cost of inputs, higher cost of ingredients and that's for manufacturers and then it comes out for consumers.

Liz Henderson:
Absolutely. And I think especially on that point of heat. Heat is the most clearly impacted climate signal that we have. 2025 was another record-breaking year for temperature anomaly. Some scientific papers are saying we've nearly breached or already breached the 1.5 degree Celsius threshold that was set by the Paris Agreement. And we know that's going to continue to impact workers who work in warehouses, in farming and across a lot of different sectors.

I think that the losses, the statistics, we really also want to think about why does this really matter and what we can do as an industry to help our clients out. And just a few other kind of, you me, I like the stats, but Aon surveys all of our clients across several different sectors on what are their top concerns from a risk perspective. And climate and weather is increasing in its ranking every year.

So for FAB companies and for farmers, the impact of climate change is the number five risk today and is expected to increase to a top three risk in the next year.

Susan Doering:
I think the interesting thing about that is it's in the top five, top three, but the other related risks like commodity price volatility, ingredient scarcity, business interruption, those are all in the top five too. And those are all the interrelated risks around climate.

Liz Henderson:
That's right. At Aon, we like to think about climate as a risk amplifier rather than a standalone thing that you have to manage independently. It is a thread across all of those risk categories. And yet there's so much of the industry that remains unprotected. Swiss Re reports out that about 55% of global insurance crop value remains unprotected from an insurance standpoint. So there's plenty of opportunity for more solutions and innovation to come into that space and protect earnings volatility and supply shocks.

But Susan, as the person at Aon who's talking the most to our clients every single day in this space, what do you think are the biggest financial and strategic stakes if this risk is not effectively managed?

Susan Doering:
So I think I'm stepping back a little bit, clearly not taking stock of not only the direct, but indirect climate risk impact is going to further strain compressed margins that all of our clients in the FAB sector are suffering with right now. And I'd like to make sure that people are thinking about it, not just as like when we think about climate risk, we often think it's about just impacts to physical assets. So impacts to your warehouse, impacts to your silo, impacts to your physical assets.

But really what we're seeing now is real issues around pricing volatility. So lack of predictable ingredient prices and quality impacts for specialty crops that are geographically constrained, like vanilla or coffee or cocoa that we heard about so much last year.

We're also seeing a lot that's related to increased operational costs in the, I'm going to call it the protein production industry, but really we're talking about aquaculture and livestock because keeping your animals at the appropriate or optimal temperature, you know, takes more effort and costs more money to keep them at the optimal temperature so that they can grow to the size they need to be for harvest.

So all of these things are challenges that are top of mind for our clients. How do they work against their compressed margins when they're faced with these additional challenges?

Liz Henderson:
You we talk about these broad statistics, but I love to really start to understand what's the impact on the ground and how does it manifest itself in a tangible way. And I was lucky enough to be in Burgundy in France and I had the opportunity to sit down with a senior winemaker at one of the oldest houses in the region.

And without prompting her or telling her I'm the climate person talk to me about climate she just openly discussed how the farmers and the winemakers in that region are already dealing with and anticipating how climate change is impacting their practices and if you think about a region like Burgundy, I mean they have been developing their winemaking practice for hundreds and hundreds of years.

What she told me is that harvests in the region are occurring about two weeks sooner than the historical averages. And so that means they have to be planning and prepared to harvest much more quickly.

Warmer temperatures that are occurring increase the sugar production in grapes, which makes them have less acidity and higher alcohol levels, which means that they taste different.

We have to innovate on the ground on an annual basis to really anticipate how these are going to manifest themselves and impact this really old historical and industry that's built on tradition and those deep values. It's crazy to see it happen on the ground.

Susan Doering:
But that's a perfect example, Liz. This is exactly what the base of our food chain is experiencing. So everybody working in the base areas of our food chain, so whether it's production of row crops or specialty crops or any kind of animal protein, this is exactly what they're experiencing and trying to manage day to day.

And I think part of what we're trying to convey today is we need to look at it differently. We can't just continue to plow forward.

I do have another tough question for you, and it's along these same lines. What are some practical steps that the FAB industry can take to address some of these challenges and maybe brainstorm around your burgundy meeting and see if they're, you what ideas would you come up with for that plan?

Liz Henderson:
Yeah, I think you're right. We can talk about the challenges and the problems. The thing that I'm optimistic about is that I do think we have solutions in order to really help shift the thinking and create a reduction in some of the impacts that these things are having.

So, the first sort of practical step is to move from a reactionary, we know the weather is getting worse. We've observed over the last five or 10 years, these shifts in harvest times, this change in the heat impacts on the quality of the crop. You have to move from that kind of historical basis to quantified risk analytics.

So really exploring the different types of solutions that exist in the insurance industry, in other parts of the value chain that can actually help you anticipate where things are going to get worse, how much worse it might get in order to triage your efforts and focus in on where you can have an impact.

And so that's step one. Get into the analytics, understand where in your growing regions you're going to see the biggest impact and start to build that triage.

I think the other thing that we would want to look at is how do you understand the impact not just on your own assets, but across your entire supply chain. And so that goes for the farmer on the ground, understanding how they're going to be impacted and what their solutions are for water stress, water resilience, innovation in fertilizers and crops varieties that can be more resistant to drought conditions or can manage and withstand heat conditions in a better way.

The third thing is that there's really no silver bullets. And what we're seeing organizations do more and more is to have a combined approach. You want to understand the analytics. You want to do scenario analysis. You want to stress test your assumptions as well. Like really look at maybe you've seen one risk evolve over the last five years, but what's the worst-case scenario look like and do some stress testing so that you can have a data-driven approach.

And then look at the operations. Like how does that analytical foundation work across your whole operation? Is it inventory strategies? Is it supplier diversification? And then finally, I would say risk transfer. But actually, what I would say is looking to the insurance industry as your proactive resilience partner or risk manager rather than a reactive risk taker.

There are a ton of innovations that are coming forward like parametric solutions, index-based solutions that can respond to specific climate triggers that help to offset some of the costs when these risks manifest themselves.

Susan Doering:
And I think that's absolutely right on point with what we're seeing too, because some of the crops that we were talking about, coffee, cocoa, and wine, wine's not a crop, grapes, wine is the wonderful endpoint.

Those are not crops that get planted every year. Those are crops that need long-term planning. So if the climate isn't good in one place anymore and you need to plant a different kind of, a different variety of grapes or if you need to move your cocoa plantation to someplace new, that's long-term planning.

And so I really like to think about the solutions that we have to offer our clients in FAB as maybe we do have some immediate or more short-term solutions around parametrics. They can be weather-based, they can be price-based, they can be a lot of things. But then we really do need to be thinking about things in the medium and the longer term, and that's where some of our stress testing and analytical tools come into play.

Liz Henderson:
That's exactly right. And I think really that long-term planning is going to help organizations be more sustainable, have more resilience, and really turn the climate impact discussion into how do I use this to create a more robust long-term strategy.

So I think just on that point, like looking ahead, Susan, what do you think is going to look different in the FAB industry especially when it comes to tackling this risk in the next two to three years? This is a hard question for you.

Susan Doering:
Volley right back over. I would say that overall there is an extraordinary level of awareness amongst our FAB clients about this risk. I think it's been growing and I think it like it's settled in as a fundamental enterprise risk for most of our larger, certainly our larger and more sophisticated clients. And I think given that's the case and that there's growing awareness about this, one of my favorite things about the insurance industry is that the insurance industry is super innovative. So when carriers hear that there's a need, there's a group within that organization that goes and does all the research and all the analytics to figure out how to build a product to solve for this problem.

So, the amount of innovation that happens within the insurance industry, I know people don't tend to think of insurance as super innovative, but if you get with the right people, it absolutely is.

And so what I'm seeing is that the insurance carriers are listening and they're evolving, they're evolving their offerings. So I think going forward, we're probably going to see a lot more use of alternative risk transfers. I like the structured solutions as an idea for clients that have difficult-to-insure risks and ways to generate capital over the long term for them.

And then the last thing, and this is my other favorite thing, is what we're seeing emerging now and I have a handful of examples of it is collaboration between what we like to call producers and off-takers, which the rest of the world thinks of as farmers and manufacturers. So where manufacturers need an assured supply of an ingredient, they're now working to protect the farmers who are producing those ingredients so that they have sustainable business models. And a lot of it is being done with insurance. And so in the event of some kind of climatic problem, the farmers are able to get back up and running again more quickly and they don't go out of business because it's a loss that they're protected from and they are coordinating with the manufacturers to put these programs in place. So I love seeing that collaboration. It's very exciting.

Liz Henderson:
Yeah, I think we are seeing this collaboration really uncover opportunities for us to develop some innovative solution.

And I love what you just said around how the off takers and the producers are working together more closely. And we do have an example where we worked with a large global coffee company who was operating in Latin America or depending on particularly Columbia for a lot of their product. And they were already observing impacts on quality of the coffee beans that were coming out of that region.

And they were also seeing, and this was super interesting to me, that the farmers are all small, family-run farms. When the crops were not producing to the same yield levels or being sold at the same price, the next generation of talent is leaving and no longer continuing to grow the coffee bean.

They are either leaving the region, migrating to other parts of the world, or moving to different crops.

And so this coffee company was faced with not just volatility on the product that they were purchasing, but also losing that long-term partnership and relationship with the farmers that is so important in order to maintain stability in the client supply chain over time.

And so what we did was designed a parametric coverage that the coffee company is able to then offer funding to the farmers directly when there's disruption, when there's a drought that triggers or too much rainfall that triggers a payout to encourage them to stay in the business of growing coffees.

For me, that was a very interesting combination of a climate really as a triggering risk amplifier, but the actual risk that we're protecting is this loss of talent over time. So I guess, know, the last question, Susan, for you is what do you want our clients to be doing after they listen to this? What can they do differently? What's the first thing they should be thinking about?

Susan Doering:
So the first thing they should do, Liz, is breathe a sigh of relief because there are solutions. Yay! It's a proactive mindset. It's proactively going after identifying, quantifying, mitigating, and transferring. So doing traditional risk management practices around all the ways that climate impacts the business. I think that clearly is a financial stressor, and clearly a lot of our FAB clients don't need another financial stressor right now.

And so there are ways to work around us. And I think just really shifting from the climate/ weather is just something that we deal with, which is what I as a home vegetable gardener think, but I'm not trying to feed the world. So, shifting from the weather difficulty or climate is something that we just absorb to the mindset of climate risk can be measured, managed, mitigated.

Liz Henderson:
Yeah, and I think from my perspective, I would say one of the great things that we can do too is bring together our risk, our finance, our procurement, our sustainability teams together in a stronger way at the beginning of some of this planning process, because it really does combine skills and has impacts across each of those operational areas of the business.

So get those teams together. Identify where there are issues, get the visibility into that exposure, and then begin testing out practical solutions.

This is not a one and done silver bullet discussion. This is a long-term practice mindset that we are your partners on for the entire journey.

Susan Doering:
That's beautiful, I have five more things that I'm going to say, but I'm going to leave it there because that was a really nice way to end.

Thank you so much. That's our show for today. I really appreciate everybody who's listening and thanks so much to Liz for joining me and for giving me all your phenomenal insights about what's going on with the climate practice at Aon.

In the next months, I hear we're going to have more episodes that are industry specific, so that'll be good. If you'd like to find out more or talk to an Aon colleague about how Aon can help your business in the FAB sector, head on over to Aon.com. You'll find contact information there. Until next time, thanks so much.

Liz Henderson:
Thank you.

Outro:
Thanks for tuning into the latest episode of On Aon. Just a reminder that Susan and Liz — along with a number of other Aon experts — will be speaking at events across London Climate Action week from June 20^th to the 28^th.

If you enjoyed this episode, don’t forget to like, share and subscribe wherever you get your podcasts and be sure to visit Aon.com to learn more about Aon.

We’ll be back next week with another episode — our Global Insight — when we’ll be talking about the latest economic and political trends hitting businesses.