How Climate Risk Assessment Helped shaping Danone's Strategy
How Climate Risk Assessment Helped Shaping Danone's Strategy
By mapping the physical impacts of climate change across 1,400 of its sites and 37 raw materials, Danone utilized the regulatory CSRD exercise to go beyond simple reporting. The group sought ways to reorient its investments and modify certain procurement strategies to reduce the financial impacts of climate risks on its business model.
Long confined to regulatory reporting, the quantification of physical risks related to climate change is progressively establishing itself as a strategic decision-making tool. A question is increasingly arising within companies: will climate risks weigh on the business model? To better understand these stakes, the Danone Group—which already had a climate strategy in place, notably with targets approved by the SBTi—embarked on an unprecedented approach. With the help of the consultancy firm Blunomy, the agri-food group analyzed 37 raw materials and 1,400 sites worldwide to model the physical impacts of climate change on the group’s activities, particularly its supply chain, by translating these risks into financial terms.
Indeed, taking physical climate risks into account is becoming increasingly essential within companies, driven notably by regulation. "Since the Paris Agreements signed in 2015, the approach has evolved: while there was initially a logic focused on understanding impacts, the 'sustainability' function is moving closer and closer to finance within companies. This is because it is about managing risks and capital allocation as effectively as possible to foster corporate resilience," says Sébastien Guillot, CEO of Blunomy. The firm, which employs about a hundred people in Paris, London, Singapore, and Australia, works primarily with large corporations and mid-caps in the agri-food, energy, real estate, and industrial sectors, as well as with the financial sector, which accounts for about a third of its turnover.
From Science to Operational Decision-Making
Blunomy positioning is based on an observation: while scientific assessments have developed considerably around carbon, water, biodiversity, and physical risks, translating them into operational choices remains difficult. "There is a wealth of expertise today on climate subjects, but a piece of the puzzle is often missing: how to transform this scientific knowledge into daily business decisions," indicates Sébastien Guillot. "To fill this gap, we rely on existing academic work (universities, scientific models, research) to confront them with the operational reality of each company." Concretely, the methodology applied by Blunomy first consists of gathering all the data necessary for modeling. Then, based on different climate scenarios, the firm translates climate impacts into financial terms. "We have several tools that allow us to financially quantify the impacts of water or energy consumption, or carbon emissions, by converting them into euros and according to different climate scenarios," specifies Sébastien Guillot. In a second step, these results help the company’s finance, strategy, and operations teams better understand the concrete implications: adaptation of the economic model, necessary investments, and potential additional revenue. "Our expertise allows the company to choose between the cost of action and the cost of inaction by estimating whether certain adaptation measures will be profitable or not," explains Sébastien Guillot. "If this comparison between action and inaction is missing, it becomes more complicated to get an executive committee or a board of directors on board in companies that are less committed to the climate issue." The company is then free to choose the level of risk it is prepared to assume and to calibrate its strategy and investments accordingly.
An Exercise of Great Magnitude
In Danone’s case, the risk analysis and modeling approach was triggered by two events. First, the group had already initiated initial work with Blunomy on localized climate risks, particularly regarding water stress in Morocco, as the latter was beginning to produce real impacts on dairy farm production. Subsequently, the implementation of the CSRD and the obligation to perform a double materiality analysis provided the opportunity to expand the analysis and conduct it on a larger scale. "The CSRD acted as an accelerator: it was the opportunity to perform a much more in-depth and structuring exercise across our entire value chain. We could have treated the CSRD as a simple matter of regulatory compliance, but we chose to turn it into a strategic lever by conducting a comprehensive diagnostic," explains Nathalie Alquier, Chief Sustainability Officer of Danone, who is also a member of the executive management in Morocco, where Blunomy was conducting initial modeling. Danone’s ambition was thus to evaluate whether its strategic plans needed to evolve in light of the climate risks the company faces, and to what extent.
The response required several months of work because the exercise covered 37 raw materials and approximately 1,400 sites worldwide (industrial, logistical, commercial, research centers, and headquarters), sometimes tracing back to the second tier of the supply chain. "For example, we studied cow feed because dairy matter is essential to our activity," details Nathalie Alquier. "This is an unprecedented level of granularity for us, which required the use of different models depending on each region but also according to products, notably between cow breeds or the type of farm." GPS data for each of the sites studied were mobilized to analyse each site as precisely as possible according to its geographical area.
During this exercise, the most demanding part was data management. "It is an extremely heavy task because it involves not only collecting data but also structuring and cleaning it to make it usable," acknowledges Nathalie Alquier. "This information existed within the company, but it had never been mobilized in this way before." On Blunomy's side, the variable quality of internal data necessitated the use of modeling tools to fill gaps. "It was necessary to make imperfect internal data—as in any company—dialogue with external scientific databases to ensure that all this produced a coherent reading of risk," specifies Sébastien Guillot. In total, the exercise mobilized nearly six months of work and involved numerous teams within Danone, particularly within the procurement and operations departments.
Concrete Decisions for Farms
At the end of this exercise, it was not the economic projections that constituted the most structuring result for Danone, but the physical impacts themselves. "For us, the most decisive factor is not the financial translation: it is impacts like yield drops, effects on herd health, pressure on water resources, availability of raw materials, etc.," details Nathalie Alquier. "These financial impacts obviously exist because if yields are under pressure, prices will logically increase, but they depend on many other market variables and external factors to be determinants other than the physical impacts on our future capacity to produce and supply ourselves." A direct consequence of this analysis: the notion of resilience, hitherto relatively abstract in strategic plans, has gained reinforced importance with a direct impact on operational decisions within the company. "The question of resilience is becoming more immediate and more concrete than we imagined," recognizes Danone's Director of Sustainability. "This has led us to reorient our long-term procurement and pushes us to support our partner farmers even further." Furthermore, some teams have integrated the analysis's conclusions into their daily operations. "Today, certain teams, notably those in charge of procurement, apply what they call a 'resilience filter': this helps us prioritize the most critical subjects in the face of future risks," emphasizes Nathalie Alquier. In terms of investment, the company has also been able to review its priorities based on the results of the analysis, for example, by reorienting funding toward supporting farmers. Regenerative agriculture programs have thus been reinforced because they are perceived as particularly effective levers for minimizing climate shocks and extreme events. "This diagnostic led us to change gears: we have increased the number of dairy farmers supported from a few hundred to several thousand," indicates Nathalie Alquier. "For example, we have pilot projects in France with, for now, 500 farmers who have implemented regenerative agriculture practices and others who are part of pilot projects."
Beyond the Danone case, the experience illustrates how translating climate issues into financial risks evolves their consideration. "When an environmental issue is translated into an economic impact, it moves beyond a 'moral' debate and enters the framework of a standard business decision, where choices are made based on risk assessment," says Sébastien Guillot. On the investor side, the question of climate risks is also becoming increasingly central. "Our investors ask us questions about our practices and our commitments regarding sustainability," emphasizes Nathalie Alquier. "Furthermore, some of our credit lines incorporate ESG criteria, where a direct link to Danone reaching its ESG objectives exists." For companies, conducting such a financial and extra-financial diagnostic could thus become a competitive advantage. "Companies that take the time today to deeply understand their physical and transition risks are likely taking a head start on their risk management and improving their future financial profile," says Sébastien Guillot. An observation that Danone, through the magnitude of the exercise conducted, has also identified. "What this type of modeling shows above all is the cost of inaction. And the simple fact of making this risk visible already creates a strong awareness internally," concludes Nathalie Alquier. Nonetheless, the analyses conducted still largely depend on the scenarios applied and the estimates for certain data. Thus, despite having numerical models of the impacts of climate change on its business models, Danone chose not to publish them as they did not correspond to the standards expected for financial communication.
A Financial Sector Lagging Behind?
With several regulations coming into force, notably European ones, the financial sector is evolving more and more on the environmental subject, but it is the opposite of companies. "Ahead of their transactions, investment funds seek our help to analyse physical and transition risks," explains Sébastien Guillot. However, investors have not yet fully grasped the scale of the issues, according to the CEO of Blunomy. "The financial sector is starting to integrate these subjects because it is pushed by regulation, but it remains very focused on carbon because it is the simplest indicator to measure," he notes. "Moreover, climate risks are probably not linear but rather exponential. Yet finance and insurance historically reason based on past dynamics."
