It’s important for global investors to learn to address and model supply chain risks if they wish to achieve financial outperformance, argues Gabriel Thoumi, director of capital markets at Climate Advisers. He makes the points well, alongside NSF’s Meredith Reisfield at a recent event in the US.
Gabriel, in an article accompanying the video, writes: “For investors, risk is broadly defined as the volatility of returns that could generate unexpected losses or profits associated from supply chain uncertainty. These risks…can impact share price, influence loss of market access, firm’s brand equity and result in regulatory issues. Overall, these risks impact a company’s balance sheet (assets, liabilities, equity, valuation), income statement (revenues, costs, profitability, net income), and cash flow.”
Eight recent case studies demonstrate this paradigm shift discussed by Meredith and Gabriel. They are:
- Operational Risk: Sime Darby was unable to expand as budgeted into a Liberian 220,000 hectare (ha) plantation with up to 165,000 ha stranded leading to a Q2 ‘17 $48 million impairment.
- Reputation Risk: JBS planned 2017 IPO, which was canceled because of bribery allegations.
- Legal / Regulatory Risk: Felda Global Ventures violates RSPO principles, leading to $5 million RSPO forest restoration liability now equal to Felda’s Q2 ‘17 net income.
- Market Risk: JBS was alleged to have bribed politicians and food safety officials, and bought cattle from ranches with illegal deforestation and slave labor, leading to shares down 35 percent.
- Credit Risk: Noble Group deforested biodiverse forest, key creditor HSBC complained, and Noble devalued palm oil investment $60 million Q2 ‘17.
- Liquidity Risk: IOI Corporation losses 27 corporate buyers after RSPO suspension, can’t sell sustainable palm oil, leading to Q2 2016 earnings of negative $14.8 million with equity valuation decrease of $800 million.
- Business Risk: United Cacao delisted by LSE, leading investors to lose $42 million.
- Strategic Risk: Sawit Sumbermas Sarana violated Unilever’s policy, so Unilever ceased procurement Q2 ’17. Sawit lost 8% revenue with shares down 15 percent.
These are useful examples to help make the business case for engagement by investors and companies in supply chain sustainability. Thanks to Gabriel for putting this piece together and bringing it to my attention.
Meanwhile, on Linkedin, as part of the discussion around my recent post :”1000 days to go…the six most difficult questions for consumer brands around ‘zero’ deforestation palm oil by 2020“, Marc Baranty asked “Is anyone looking at the effect of zero-deforestation campaigns on agricultural commodity prices?” And Gabriel had this to say in reply:
“Tobias and Marc, we are seeing some signs of sectoral level equity price risk occurring, given that there may be equity price deflation at the sector level rising from palm oil production and supply chain risks associated with deforestation concerns. At the individual company level, we can now confirm that deforestation risks in supply chains have been financially material for a number companies. While many companies have experienced downside risk (e.g. their share prices decreasing in value), it is also important to emphasize that forensically we have observed companies experiencing upside risk (e.g. their share prices increasing in value) because of their effective deforestation risk management. We will be discussing these cases in detail during the Innovation Forum event in Washington, DC April 18-19″ (details at: “How business can tackle deforestation: Keep targets on track, manage expectations and demonstrate progress“, 18th-19th April 2018, Washington DC)
Our forthcoming events
- How business can tackle modern slavery and forced labour – 7-8 March 2018 – London
- How business can make smallholder supply chains resilient – 13-14 March 2018 – London
- Can innovation and technology make agriculture sustainable? – 5-6 April 2018 – Washington DC
- How business can tackle deforestation – 18-19 April 2018 – Washington DC
- Sustainable apparel: How brands can transform supply chains – 24-25 April 2018 – Amsterdam