Executive Summary
This report, analyses the growing climate risks for four major crops across top-producing countries, offers an overview of contractual approaches to building resilience, and analyses the available cover in the traditional insurance market and additional opportunities offered by parametric insurance.
Key insights:
- Heatwaves and droughts are the most significant hazards for the analysed crops, with high or very high heatwave exposure rising from 64% to 96%, and drought from 56% to 80% of crop regions by 2050.
- Hail, precipitation, and wind risks are also increasing but vary by crop and region.
- Businesses must assess and monitor supply chain risks, implement site-specific protections, and consider strategic actions like supplier diversification and climate risk training to build resilience.
Opportunities to build resilience via contractual strategies:
1
Supplier diversification
Contracts should support onboarding multiple, non-exclusive suppliers across jurisdictions to mitigate disruption risks.
2
Forecasting
Including supplier commitments to meet forecasts to ensure supply predictability and enable remedial action for shortfalls, while avoiding restrictive minimum volume commitments.
3
Due diligence
Contracts must incorporate business continuity and disaster recovery (BCDR) plans, with clear force majeure clauses that exclude foreseeable climate events and allow flexible sourcing alternatives.
4
Transformation and ESG alignment
Suppliers should commit to continuous improvement and ESG compliance, including the integration of advanced technologies like AI and adherence to regulations such as the EU AI Act.
5
Reporting requirements
To comply with EU directives like CSRD and CS3D, contracts must mandate transparency, data sharing, and regular sustainability audits.
6
Governance and training
Strong contractual governance frameworks should include regular supplier engagement, escalation protocols, and mandatory ESG and BCDR training.
The report also highlights further opportunities across banking, tax, insurance, and commercial agreements. These include embedding sustainability clauses in financing, leveraging tax incentives for climate initiatives, integrating climate risk provisions into insurance, and ensuring regulatory compliance through adaptive and enforceable contract structures. By embedding resilience and sustainability into contractual frameworks, organizations can better navigate climate risks, regulatory obligations, and ensure long-term supply chain integrity.
Traditional insurance products offer limited protection, typically covering only direct asset loss and not broader impacts like supply disruption or commodity price volatility.
Using California’s almond industry as a case study, the report highlights how climate events—such as drought and wildfires—can significantly reduce yields despite increased cultivation, driving up prices and affecting manufacturers worldwide.
Emerging parametric insurance solutions offer a promising alternative. These products trigger payouts based on specific environmental conditions (e.g., drought, low rainfall) and can protect manufacturers from price surges and supply chain disruptions. Examples include products like ChAI Protect, which covers raw material price volatility tied to defined triggers.
To achieve broad adoption, parametric insurance must become more accessible and cost-effective. This requires industry collaboration to scale innovative solutions, ensure affordability, and build a competitive market that can protect the global food and beverage industry from systemic climate risk. Lockton is actively pursuing partnerships to lead this transformation.