Erste Asset Management

What does climate change have to do with alcohol? – Investment Board

What does climate change have to do with alcohol? – Investment Board
What does climate change have to do with alcohol? – Investment Board
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The big chateaux in the Bordeaux region, Hofbräuhauses, and abbey distilleries: alcohol is a distinctive cultural good. It is not by accident that big events are always accompanied – and fuelled – by alcoholic beverages.

However, the same mechanisms that nurture joyful exuberance can cause the opposite effect in case of overindulgence: the lifted mood can quickly turn into spleen and aggression. To this day, pharmacologists have not been able to fully understand how the same substance can trigger such contrary effects.

The risks resulting from excessive alcohol consumption are the reason why our research partners have awarded alcohol a negative rating from the perspective of the UN’s sustainability goals across the board. Their rationale is that a drug is not less dangerous just because it is culturally significant. For example, khat is of central cultural importance in Yemen, but at the same time it uses up half of the water in the country, causes enormous economic harm, and has led to the world’s highest rate of mouth, tongue, and oesophageal cancer.

From a sustainable investor’s point of view, it is also important to be aware of these risks and to include them in the ESG assessment of the companies. The product itself is as important as the production conditions.

Protection of high-risk customer groups

Our partners cite the promotion of responsible consumption and marketing as most important criteria. Pernod Ricard stands out as the company that cares most about the protection of high-risk customer groups.

A central topic is the protection of minors. The most important companies do not advertise in the environment of children and young people and only show adults in their commercials. The campaigns do not depict excessive alcohol consumption or suggest that alcohol boosts self-confidence or social acceptance.

One weakness across the industry that our research partners have identified is the gap in terms of sustainability efforts between companies in Western markets and those in emerging markets. Although some companies have launched programmes to curb DUI activities in Columbia and Namibia, the overall situation in emerging countries remains unsatisfactory.

Water shortage causes problems

The second factor are the production conditions. Climate change and the worsening water shortage are threatening more and more growing areas. While irrigation is currently still illegal for the vines of top-quality European wines with protected designations of origin, the expected book losses of vineyards will be immense if growing vines in the specific regions becomes impossible. One hectare of cultivable area in the Champagne region is currently worth more than EUR 1mn. Therefore, an increasing number of vineyards allow irrigation, which increases the burden on local water supply further. This has become costly yet common practice in at-risk areas such as California and Australia.

Beer, too, is in danger: more than a third of global barley production comes from regions with extreme water shortages. As one of the first companies, ABInbev has therefore rolled out a water management regime across its entire supply chain. Companies such as Diageo and Treasury Wine are confronting these risks through improved methods of cultivation that put to the fore soil quality and bio diversity. But overall, the activity reported in connection with measures aimed at averting climate change is still relatively subdued.

Rising costs for improved sustainability

Environmental risks may yield two positive aspects. The endangerment of global cacao production has made the fate of the farmers a priority for the chocolate industry. The same thing could happen here. We also expect rising costs to put pressure on discounters in favour of the producers of premium brands, which typically also excel in better sustainability efforts.

Finally, some good news: rum – that cosy drink warming us around Christmas – is relatively less at risk than other beverages, according to our partners.


Read more articles from this issue of our ESG letter here.

*ESG stands for Environmental, Social and Governance“ – These are the three broad categories according to which companies are examined in sustainable investment.


Legal note:
Prognoses are no reliable indicator for future performance.



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