Lessons learnt from COVID-19 will better help the industry deal with future shocks such as climate change
The impact of the pandemic on the food agribusiness and beverage sector has been mixed. Some businesses have thrived, while others have struggled to survive depending on what channel the business is selling into, and how its distribution networks and supply chains have been affected.
Aon’s recent COVID-19 Risk Management and Insurance Survey reports that 12% of respondents in this industry have thrived, versus an all-industry benchmark of 7%. Over half (54%) say while they have been impacted, their business has remained resilient. That still leaves a sizeable contingent who have struggled, and increases the need to focus on a better approach to enterprise risk management (ERM), and an understanding of how future shocks like climate change could impact their businesses.
COVID-19 has forced change
Businesses operating in food agribusiness and beverage provide essential services and products. People have to eat and drink whatever the crisis, but COVID-19 has forced change. Instead of eating out, for example, many of us have eaten at home more. In turn, that has had an impact on the sector. If you’re a business selling bacon products, for example, or staples like pasta or flour through supermarkets, you might well be struggling to keep up with demand. But if you’re selling luxury chocolate through retail outlets at airports, or quality meat cuts to the restaurant sector you will be in a difficult place.
Success over the pandemic for a food and drink business depends on the channel they’re supplying and how they’ve been able to understand and cater for consumer sentiment and consumer desire. There has been a shift towards digital and people buying online in a way they haven’t before and innovative food and drink producers have found a way to tap into that demand. COVID-19 has forced that agenda to rapidly scale.
Triple whammy
Of course, COVID-19 hasn’t been the only external disruptor for the industry to deal with in the last year. Businesses have had to cope with a sharp rise in insurance prices with some insurers exiting the market altogether because of the losses they’ve experienced. And then there is Brexit. High levels of uncertainty and market volatility have affected businesses as they tried to anticipate the outcome of trade negotiations. And, even though a deal was done, there are still challenges which will continue to impact businesses, not least with ongoing customs red tape and delays.
In response to these critical issues, most businesses have had their risk management approach rigorously tested. According to Aon’s survey, 39% of agrifood businesses believe that their risk management and insurance could be better integrated – this is higher than other sectors (28%). And a similar proportion believe the pandemic will accelerate a review of their ERM process.
Optimise ERM
We are having lots of discussions with clients around their optimal ERM structure. While a lot of the risk purchase decisions sit in finance, treasury, risk and internal audit, much of the enterprise risk sits in the production sites and factories. We’re seeing larger clients move to create more collaboration between the different functions to counter the risk that there is too much assumption built into the process.
The combination of the hard market and the COVID-19 shock are driving the most prudent risk managers to ask “what do I do the next time something like this happens to prepare ourselves and make sure all bases are covered?”
Climate shock
One potential future shock they’ll be considering is climate change, which is rapidly becoming more prominent on the corporate agenda. Why? From a governance perspective, investment capital is attracted to businesses who can demonstrate positive behaviours in relation to the climate. Secondly, consumers have an expectation that their food will be produced in a climate sensitive way and in some cases are willing to pay a premium. And thirdly, if you have a factory by a river and you’re flooded, sympathy is likely to be thin on the ground with an expectation that the business should have understood and assessed this risk, and used the mitigation tools available.
Climate change is also impacting the war for talent. Many people – particularly younger employees – only want to work for a business that identifies with their values in areas like the environment and sustainability. That means businesses will have to not just talk a good game on climate change but also make good on their promises if they want to attract the brightest and the best.
Learn the lessons from COVID-19
Aon’s survey found that half of the respondents in the food agribusiness and beverage industry believed it would take more than a year to recover from the pandemic. No one wants a repeat of that kind of upheaval. That means the imperative now is to take the lessons from COVID-19 and whether the risk is another pandemic, climate change, talent shortages or food safety, ensure that the organisation benefits from planning enterprise-wide strategies to cope with future shocks and be in a position to recover more quickly and successfully.