Under sweeping regulations taking shape in the European Union, major food companies from around the world will need to disclose their plans for tackling their contributions to climate change and nature loss.
To help investors, regulators, and other stakeholders evaluate and track how companies are addressing the risks and opportunities they face, the EU is adopting a trio of new regulations: the Deforestation-Free Products Regulation (EUDR), Corporate Sustainability Reporting Directive (CSRD), and Corporate Sustainability Due Diligence Directive (CSDDD). All three new rules will require food companies that operate or sell in the region to more transparently report how they are impacting the climate and nature through their business operations and value chain.
Since the regulations apply to any company across sectors with operations in the EU, they will have major implications for the global food sector and investors are analysing what the new rules mean for the food companies they are invested in. At the same time, the new regulations promise to provide the insight and action on climate and nature risk that investors have been calling for from food companies.
The compounding regulatory risks in the EU stack upon the immense material and financial risks from the climate and nature crises that the food sector is already facing. Accounting for about one-third of all greenhouse gas emissions globally, the sector is also a key driver of deforestation and nature loss worldwide.
Furthermore, the regulatory risks associated with the EU’s corporate sustainability regulations will be particularly acute for the food sector, as the EU employs a unique double materiality approach to disclosure. Companies are required to report not only on how their business is affected by sustainability issues – known as financial materiality, but also on how their activities impact society and the environment, otherwise known as impact materiality.
This is why urgent, sector-wide action is needed, and why investors are increasingly asking companies to map out their plans for mitigating climate and nature risks. Among the actions investors are paying particular attention to are creating and disclosing climate transition plans, assessing and disclosing nature and biodiversity risks, and removing deforestation from value chains.
Create and disclose climate transition plans
The CSRD and CSDDD – if and when the latter is finalised and adopted – both will require companies to create and disclose transition plans for reducing their greenhouse gas emissions, including Scope 3 emissions linked to suppliers and customer use of products and services, to reach the EU targets in line with the Paris Agreement goal of limiting warming by 1.5C.
Robust and comprehensive transition plans are the blueprint for food companies to address their climate and nature risks by decreasing greenhouse gas emissions, while also mapping out future growth opportunities and competitiveness in a low-emissions world. These plans should include the key elements identified in the Ceres report on food sector climate transition plans, such as describing how growth and innovation strategies align with a low-emissions economy and explaining how supplier engagement strategies will reduce scope 3 emissions and climate risk. Importantly, plans should quantify how the company’s strategies will lead to the emission reductions necessary to achieve its climate targets, which yet done.
Disclose biodiversity and nature risks across value chains
The CSRD and CSDDD have extensive requirements for corporate disclosure of biodiversity and nature impacts, and the CSDDD would also compel companies to report their business-wide plans for reducing ecosystem degradation through efforts such as reducing water pollution by agricultural chemicals and plastic waste from food packaging.
With over half the world’s economy reliant on nature and the services it provides, food companies need to understand their exposure to biodiversity and nature risks — and the impact they are having – and disclose how they are mitigating these risks. Investors are increasingly engaging companies and joining global investor-led initiatives like Nature Action 100, of which Ceres is a partner, to encourage urgent ambitious corporate action on nature and biodiversity loss. That initiative has already laid out its Nature Action 100 Investor Expectations for Companies, which include publicly committing to minimize contributions to the key drivers of nature loss and assessing and disclosing nature-related impacts and dependencies.
Remove deforestation from value chains
Companies covered by the EUDR will have to eliminate deforestation and forest degradation from their supply chains and operations starting next year, and the CSRD and CSDDD also require companies to disclose their deforestation impacts, such as razing forests in Indonesia for palm oil plantations, and plans to mitigate those impacts.
Protecting forests goes hand in hand with food companies reducing the risks their operations face, meeting their climate targets, and slashing their impact on nature and biodiversity around the world. As many major food companies have already made public commitments to eliminate deforestation and conversion of land to produce agricultural commodities from their value chains by 2025, the EU’s new rules add additional pressure to deliver upon those commitments. Companies should use three strategies to reach those deforestation commitments: make time-bound commitments, create implementation plans to achieve those commitments, and disclose progress on those plans.
Due to the escalating risks of climate change and nature loss, the policy response in the EU and other parts of the world is not unexpected. Companies need to be prepared to comply with the regulations – and respond to investor asks – by developing climate transition plans, disclosing biodiversity- and nature-based risks, and cleaning up their value chains.
Meryl Richards is acting programme director for food and forests at Ceres