Overview of Emerging Risks
We are constantly reviewing changes in our operating environment and looking for trends that may have a longer-term impact on our business. As a result, our emerging risks can and do change regularly as we gather more information and review their potential impact.
For reporting purposes, we revise our Emerging Risks biannually and report key emerging risks on our website and Integrated Annual Report annually.
Our key emerging risks as at February 2024 are::
1. DEVELOPMENT OF ARTIFICIAL INTELLIGENCE
Description of the risk
The amount of data we create and consume is constantly increasing exponentially. With the help of emerging technologies and more specifically artificial intelligence (AI), we will be able to capture and analyse internal and external data to help us make more informed business decisions. The application of AI spans across several business processes and will support our acceleration, augmentation and automation of business processes and user experiences. Examples are planning sales visits, retrieving product information from store visit pictures, and optimizing our transportation. Recently we also introduced the use of digital assistants for productivity gain such as summarizing emails.
However, AI technology also poses various risks to the organisations, society and individuals due to potential misuse by malicious actors and potential of unintended consequences.
While we are utilising AI primarily for efficiency gains and enhancing insights from largely internal data for non-critical business processes; and we do not rely only on AI for decision-making, we have assessed the risk associated with AI as low. We have existing policies and guidelines and have enhanced training and awareness on appropriate use of AI. As a result, we are comfortable that we have captured the risks and management of those risk within the existing Principal Risks associated with Cyber Incidents and Data Privacy.
What remains an emerging risk is the broader use of AI, its application to external data and potential over-reliance on AI as an end-to-end decision support tool. We will develop a process to monitor the use of AI and revisit our risk assessment regularly.
Potential Impact
- Errors in algorithms or biases could lead to faulty decisions affecting our ability to consistently supply product to our customers.
- AI could increase the severity of cyber-attacks against our information systems leading to violations of rights to privacy of individuals and non-compliance with privacy requirements of the legal and regulatory framework.
- The use of AI could increase the severity of cyber-attacks against our production systems leading to business interruption and inability to supply our customers.
- Our employees may be concerned about the privacy of their information or potential loss of jobs with greater automation of financial or production systems.
Mitigating the risk
- We have conducted a thorough assessment of the risks associated with AI and will revisit our risk assessment regularly.
- We have established a cross-functional team to ensure compliance by design and a robust governance and operating model to ensure deployed AI technologies are secure, safe, ethical, and comply with internal corporate policies.
- We have established a central inventory of all AI technologies mapped with specific business use cases and developed a process to monitor the use of AI across the business. We are particularly focussed on the application of external data sources and its use in decision-making.
- We are taking and will continue to take all appropriate actions to safeguard that personal data are collected, processed and used in a way that respects individuals’ privacy rights and freedoms.
- We have developed and communicated organizational policies on the acceptable use of AI technologies and executed awareness campaigns to achieve long-term lasting behavioural changes.
2. The impact of our sustainability performance on our reputation
Description of the risk and opportunity
We have made strong commitments to increasing our sustainability performance including our NetZeroby40 commitment. We recognise that our sustainability performance has a very significant impact on our reputation with key stakeholder groups both positive and negative. Failing to meet expectations could have a significant tangible impact on our business including the attractiveness of our company for current and future employees which may affect our ability to attract and retain sufficient talented people; the willingness of investors to continue to invest in our business affecting our cost of capital; and the willingness of consumers to purchase our products which affects our sales and ultimately our viability as a business. Likewise meeting, and exceeding expectations could have a very positive impact on our attractiveness as an employer, as an investment and enhance the attractiveness of our products to consumers.
Expectations will continue to change as the effects of climate change become more apparent and pressure continues to build on companies to reduce their impact on the environment. While a number of different climate scenarios have been described – and we have used a number of these climate scenarios in our own assessments and planning, considerable uncertainty remains as to which scenario or elements of multiple scenarios materialise. We have also noted increasing investor activism and increasing consumer and regulator scrutiny of our sustainability performance.
Our Scope 3 emissions – those that are not within our direct control, represent around 90% of our carbon footprint. While we can and are influencing our suppliers and customers, we are very much dependent on them to also take significant actions.
Potential Impact
- Increase or decrease in the attractiveness of our company as an employer, increasing or decreasing our ability to attract sufficient talent to our company
- Increase or decrease in the willingness of investors to invest in our company affecting our share price and ultimately our ability to attract capital at attractive rates
- Increase or decrease in consumers’ willingness to purchase our products affecting our sales revenue.
Mitigating the risk
Of the three key stakeholder groups, employees and investors are well aware of our environmental performance through external ESG ratings, including being ranked, for the 7th time as the world’s most sustainable beverage company by the Dow Jones Sustainability Indices. While this is a source of great pride, we cannot afford to become complacent so meeting our sustainability commitments and expectations of key stakeholders remains a strategic objective of our company.
We believe the most significant opportunity, and also the highest risk, exists with enhancing consumer perceptions of our environmental performance and therefore increasing the willingness to purchase our products. In order to do that, we not only have to continue implementing innovative solutions for reducing our environmental impact, but we also need build greater awareness amongst consumers of our achievements and our actions to deliver our beverages in more sustainable ways.
3. The cost and availability of sustainable packaging
Description of the Risk
Sustainable packaging continues to be top of mind for consumers and other stakeholders. Governments and non-government organisations are driving change through regulations such as the new EU Packaging Regulation.
We are continuing to see increasing pressure to adjust our pack mix to meet these concerns, reduce waste and use more recycled material. We have publicly committed to a NetZeroby40 target however around 34% of our carbon emissions are generated by our use of packaging which means our future packaging has a significant influence on our ability to meet our commitments. In addition, major changes to our pack mix require significant investments in new production lines and potential for redundancy in existing production lines. It may require significant changes to our distribution.
As we increase our focus on our future pack mix, we have also identified a number of variables that, because of their longer-term nature, we don’t yet fully understand including the impact of significantly increased carbon prices flowing through to the price of PET and Aluminium.
PET and Aluminium are key materials for our current and projected pack mix to 2030, however they require considerable amounts of energy in their production and generate considerable carbon emissions. Considerable uncertainty exists for period between 2030 and 2040 when we expect that carbon costs will become more significant. In our assessment of “Managing our carbon footprint” (see our Principal Risks) we concluded that if governments and organisations remain focused on keeping global warming to no more than 1.5 degrees – the Paris Ambition scenario, the cost of carbon may increase dramatically over the next 10 – 20 years. This could lead to significantly increased costs, potentially making these materials less economically viable.
While there is a strong focus on recycled packaging, there is a shortage of good quality material for recycling and a considerable percentage of recyclable material is lost in the recycling process reducing the availability of material for us to recycle.
Finally, PET in any form, whether virgin or recycled, may not be acceptable to consumers, reducing the viability of PET as a packaging material.
Potential Impact
- Decreased availability and increased costs of packaging materials that are currently a critical part of our business strategy
- Significant changes to our production facilities to cater for different packaging requiring considerable long term capital expenditure
- Impact on our reputation, and ultimately sales, if we are not able to deliver our products in packaging that is acceptable to consumers
- Potential opportunities for our business in leading the delivery of beverages in innovative sustainable packaging
Mitigating the risk
In 2023, we delivered our “pack mix of the future” project, including a comprehensive quantitative assessment of the risks associated with the various options. The project has provided an overview of our pack mix to 2030 given the number of variables that affect packaging in the longer term.
We continue to work on the development of a profitable packaging strategy that reduces our environmental impact and addresses escalating stakeholder concerns relating to packaging waste. This includes investments in recycling technology and new packaging materials as well as working closely with our suppliers to reduce the impact of existing materials on the environment.
4. ESG Risks in our Supply Chain
Description of the risk
There is an increasing demand for transparency in environmental, social and governance (ESG) performance as the potential impact of climate change becomes clearer and companies are increasingly held accountable to contribute to reducing the drivers of climate change.
The EU Corporate Sustainability Due Diligence Directive came into effect in early 2024 and it is expected that EU countries will transpose the Directive into national law over the next two years. There are rightly expectations that companies identify and take action to ensure human rights, including appropriate working conditions and living wages, are respected, and implemented throughout their value chains. We may increasingly be held responsible for the actions or lack of compliance of suppliers deeper in our supply chain where we currently have less visibility. In addition, we are expected to use our influence in the value chain of which we are part to drive change.
Potential Impact
- We could be held responsible for suppliers involved in incidents of non-compliance which can lead to reputation risks, and fines as well as additional costs in finding alternative suppliers.
- Additional due diligence requires additional management time and effort increasing our costs.
- We may also have difficulty accessing ingredients that are impacted by climate change or we may have to pay more for those ingredients.
- We may not meet our stated sustainability goals by 2025, and future sustainability goals as it relates to ingredient sourcing and climate change
For more details on our water risk assessment, please see page 76 of our 2022 Integrated Annual Report (IAR).
Mitigating the risk
We are continuing to build our relationships with suppliers through initiatives such as our supplier sustainability forums as well as greater engagement to ensure more sustainable sourcing (e.g. training, joint initiatives, joint sustainable goal setting etc.). Our buyers were retrained during the year on the sustainability risk assessment tools available for supplier selection and governance. We continue to expand the use of the EcoVardis system to support our supplier ESG performance assessments for better, more objective supplier monitoring. This will increase our visibility deeper into our supply chain.
We are conducting deeper assessments into the potential impact of climate change on our suppliers and the implications for our business. We will continue working with our suppliers to support them in setting and delivering on their sustainability goals, including setting science-based carbon reduction targets.
5. Cost and Availability of Water
Description of the risk
Water is fundamental to our business. It makes up the largest percentage of our products and is a key part of our production processes. It is also critical for our suppliers of agricultural ingredients, and for the local communities in which we operate. Maintaining high quality, reliable watersheds is not just critical for our business but also for our relationship with our communities and suppliers.
Climate change is expected to have a significant impact on watersheds around the world. According to the latest report from the Intergovernmental Panel on Climate Change (IPCC), more than half the world’s population faces water scarcity for at least one month every year and this will increase in the future.
During 2023, we updated our assessment of the potential impact of climate change on our business under two different climate scenarios (RCP4.5 and RCP8.5), including the availability (physical risk) and cost (physical and transition risk) of water by 2030 and 2040.
Our assessment indicated that climate change is not currently having a significant impact on the availability and cost of water but is likely to do so by 2030 in the climate scenarios that we considered. This is a result of an increase in the level of water stress particularly in areas that we have already determined are in water-stressed areas, which we refer to as “water priority” plants or locations.
In addition, the management of water resources is a key concern for a range of our key stakeholders and ranks very high in our annual materiality assessment. We expect increasing attention to water security concerns driven by the outcomes of events such as the UN Water Conference and potential for increased reporting requirements and government and non-government organisation pressure to reduce water usage.
Potential Impact
- If water availability decreases due to climate change or significant water withdrawal from upstream users, it also will lead to disruption of the water supply to our operations and to communities in which we operate.
- If we use significant amounts of water from the local watershed, it may reduce the availability of water for local communities and damaging our reputation.
- We have assessed that climate change could lead to an increase our annual baseline water costs by up to 40% by 2030 however a combination of additional investment and reduced water usage could lead to a savings of 15% in annual water costs by 2040.
- We need to spend an additional €111million in capital expenditure between now and 2040 to meet our water needs and to replenish watersheds for local communities in water priority areas
- For our suppliers, the water risk could lead to decreased crop yield, disruption of their supply processes, issues with quality of ingredients, decreased income, while for us it would lead to increased cost of ingredients or production disruption due to ingredients or raw materials not being available in the quantity or quality we expect.
For more details on our water risk assessment, please see page 102 of our 2023 Integrated Annual Report (IAR).
Mitigating the risk
- Continue to implement water usage reduction plans across our operations with a focus on our water priority locations;
- Continue to implement water stewardship programmes in water priority locations to mitigate shared water risks;
- Update source vulnerability assessments for all plants and enhanced our plans, including identification of additional capital expenditure required for enhancing infrastructure.
- Continue to implement additional community water projects to help secure water availability for local communities in an additional four locations.
6. The impact of extreme weather on our production and distribution
Description of the risk
It is generally accepted that global warming has made significant changes to weather patterns. That means that the world is experiencing more frequent and more severe incidents such droughts and storms.
We do not believe these changes have significantly impacted our business yet. We do have and have had for long periods of time, production facilities located close to water courses known to be susceptible to flooding. We have production facilities located in areas known as being at higher risk for droughts and wildfires.
Depending on the global response to climate change, our production facilities and distribution networks may be impacted by extreme weather and its effects in the future. As there are so many variables, it is very difficult to accurately assess how climate change may impact us.
Potential Impact
- We may have disruptions to our production or distribution which reduces our ability to supply our customers. This may impact our reputation as a reliable supplier and lead to financial losses if we do not have sufficient product to sell.
- Events such as extreme storms, flooding or wildfires may damage our production facilities or equipment leading to financial losses
- Insurers may increase insurance premiums to cover increased property loss or business interruption risks associated with more frequent or more severe weather events
Mitigating the risk
In 2023, we updated our assessment of the risks to our production and distribution as a result of climate change using multiple climate change scenarios. Our assessment was focused on climate scenarios RCP1.9, RCP4.5 and RCP8.5.
We identified 17 plants that require additional capex to reduce their vulnerability to climate related events primarily wildfires, flooding and intense precipitation. We are developing adaptation plans such as fire suppression and landscaping changes, flood mitigation works and stormwater upgrade systems. We estimate that the costs of these adaptation plans will amount to €32m over the next five years, of which €5.7m is required as a direct result of climate change.
In 2023 we completed a comprehensive assessment of the potential for business interruption across our top 8 plants (representing approximately 70% of our total volume) for all types of events, including extreme weather caused by climate change. We are updating our business continuity plans to enhance our capability to supply our customers if reasonably foreseeable disruptive events occur.
In addition, we estimate that if insurers were to apply an estimated increase of 30-40% in insurance premiums to production facilities that we have identified as being at higher risks as a result of climate change, we could see an increase in our insurance premiums of €1.5m annually. In order to mitigate the potential rise in insurance premiums, we will collaborate with our insurers to ensure they understand how we have assessed these risks and the adaptation plans we are developing to mitigate them
