When Climate Hazards Collide

Climate change doesn’t just arrive one disaster at a time. It stacks crises on top of each other: drought followed by flood, heat followed by fire; shocks that turn small problems into big financial hits. In this episode, we talked about how compounding climate hazards are reshaping the bottled water industry, what a 2024 Nestlé scandal reveals about the future of water quality, and why investors should be paying closer attention. 

Host: Mike Disabato - MSCI ESG Research

Guest: Cole Martin - MSCI ESG Research

Link to paper discussed in episode: https://www.msci.com/research-and-insights/blog-post/compound-climate-hazards-pressure-beverage-giants

Transcript

Mike Disabato (00:00):

What's up everyone? And welcome to Sustainability Now, where we cover how the environment, our society and corporate governance affects and are affected by our economy. I'm your host Mike Deto, and this week we look at how climate hazards can compound on top of each other, spelling trouble for the company that you listener have invested in. Thanks as always for joining us. Stay tuned. Climate change rarely arrives as a single disaster. Instead, it sort of layers one problem on top of another. There's a drought that weakens soil due to a lack of water, which is then hit by rain, causing cascading floods, a heat wave that sets the perfect stage for a spark to engulf a forest and its surrounding town. These are these overlapping shocks of climate change that devastate communities in a very public way. But in the financial markets, it's usually the spark that gets most focused, the dramatic one-off disaster, the hurricane, the wildfire, the flash flood.

(01:03):

But it's the quieter chronic pressures like water scarcity that set the stage for the significant long-term disruption to our economy. And when the chronic and the catastrophic climate hazards collide, the fallout for businesses can be enormous. It's a problem often called compounding events, and it's misunderstood by investors that look at climate physical risks in isolation or so argues. My colleague and guest today, Cole Martin, who along with his co-author Elsher Mamado, recently wrote a blog on the topic titled Compound Climate Hazards Pressure Beverage Giants, the link of which I of course put into our podcast description and they start this piece off that explores compounding risks and how they're going to affect. You may have guessed beverage companies by looking at what happened in France in 2024 when Nestle, one of the biggest names in bottled water, found itself to be put glibly in pretty deep water, what looked like a technical issue with how they filtered water turned out to be a warning sign of how climate pressures compile up and really take a company down. Here's coal, given the context

Cole Martin (02:10):

Under European and French law. Basically, if you sell bottled water as natural mineral water, it must be bottled directly from the source and can't be treated or altered, including using things like disinfection or filtration in a way that changes the properties of the bottled water. So in 2024, there was an investigation by Lamond and Radio France, which revealed that around a third of French bottled mineral water brands. So that includes Perrier, Viel, apar, and contracts had been using these prohibited purification techniques possibly as early as 2019. So in part because of the expose, the French Senate launched an inquiry in mid 2024 into the use of banned treatments in mineral water and also the role of the French government in monitoring these practices. And so they released a report in 2025, and what it essentially said was that Nestle was using some of these illicit practices.

(03:11):

And interestingly, the report also criticized the French government for covering up these illegal treatments and not being transparent with the French people and European regulators. So this is a problem for Nestle, which owns some of those brands on a couple of levels. First of all, Nestle was fined 2 billion euros, and there's of course, a potential reputational cost of selling a product that could be misrepresented as premium, which natural mineral water is even when the product itself technically isn't. And there's a second issue, of course, which is a broader problem, which is why Nestle felt the need to introduce these filtration techniques in the first place.

Mike Disabato (03:54):

So that's a pretty intense situation. The Senate got involved, the French government was called to task Nestle and the French government did try to handle these overlapping risks sort of quietly, but instead the compounding pressures expose them and drown their reputation in a way in the process. But this situation is more than just a one-off scandal. What Nestle faced is an example of how climate pressures stack up on top of each other. And the reason they needed to introduce these filtration systems in the first place is pretty simple. Things got really dry, then all of a sudden they got really wet.

Cole Martin (04:26):

If you have heat and drought simultaneously, not necessarily individually, but simultaneously, that can reduce the ability of the soil to absorb water. So as the ground essentially gets harder, if there is additional rain, not initially flooding, just more rain even than usual or even regular amounts of rainfall, if the ground is unable to absorb that rain, that water obviously has to go somewhere. And as it goes that somewhere it can pick up potentially contaminants on the way. So things like pesticides and fertilizers on farmland and whatnot as it reaches other water sources. So for example, rivers or streams, that water may interact with groundwater and then therefore lead to the kind of contamination that these companies will then have to avoid by adding or implementing these purification techniques.

Mike Disabato (05:24):

Now this takes us to the larger financial question. It's not just one company that you kind of need to look at as an investor. You need to understand sort of how the industry is comporting itself as a whole. And you would think that these sort of well-known ecological processes would be well understood by an industry that relies on fresh water sources and thus have prepared for problems such as bacterial runoff. I mean, one would assume that, but the preparedness of companies for these risks was actually the exact thing that Ocean sought to find out. So we can remove that assumption and get to kind of their findings. And here's what they got to.

Cole Martin (06:01):

So using the Nestle example, we thought, okay, who else sells bottled water and may be at risk here? And so using the list of companies that we have that are listed that sell bottled water, and then we're also exposed to similar risks based on where their assets are. We highlighted Santo Beverage, Danone, PepsiCo, Vita Cocoa, and Tata consumer, specifically their bottled water division obviously. So they're the ones who are going to be at risk of this based on the location of their assets. And so we also thought, okay, what water management programs do they have in place that may help mitigate these risks? And we found a couple of interesting examples. So Danone, for example, says they work with farmers to help reduce farm level water contamination. And this could be quite important athlete because agricultural runoff and industrial runoff from pesticides and fertilizers could be one of the particular factors that leads to increased contamination and therefore the need for these filtration practices. And we also have seen that Pepsi, Pepsi as well has programs help to improve the health of local watersheds where it's operating. And so the idea being there is that if you have naturally healthier watersheds, again, that could reduce the risk of potential contamination and again, reduce the need for these practices.

Mike Disabato (07:27):

Right? So Danon has a reduced reuse recycle program with farmers. PepsiCo has a comprehensive approach to become net water positive, they call it by 2030, which includes practices that improve efficiency, particularly in high risk areas and improve the health of local watersheds. These are the sort of best practice processes, if you will, for beverage companies that face a high level of drought and possibly flooding and water risk in general. And the way that coal and ocean got to their findings was by looking at a company's hazard percentile, which is basically a ranking of how much climate stress a company's assets face compared to thousands of others globally. And they compared that to their average annual loss, which estimates how much of their output a company's output of course could be lost due to a certain amount of hazards, whether that's factories shutting down from floods or production lines slowing because of heat and drought.

(08:22):

Now you can look at the graphs that are in their blog and see where each company in the beverage industry lies on this scale and what they have planned to do about it, if anything. But sometimes it seems like there's really nothing that can be done. If Nestle wants to sell natural mineral bottled water, it must rely on certain filtering techniques that may not be able to deal with the sort of toxic contaminants that Nestle was dealing with. I believe the words fecal bacteria and perera bottles were used in the conversation. This isn't something you want to hear. So I asked Cole if this meant that certain operations may need to cease in this new world, bottled natural water being one of them,

Cole Martin (09:05):

Not necessarily. I mean, Nestle itself has basically said they're going to sell off their bottled water unit, so that may not be a great sign. I think overall within the industry, and I will give out a shameless plug to a previous podcast we did on this, looking at the bottled water industry kind of more generally, I do think there is some research out there suggesting that there will be greater demand for bottled water going forward for different reasons in different places and developed markets. It could be greater demand for functional drinks, and in the emerging markets it could be demand for rising populations and rising incomes in places where in, for example, semi arid places, they don't necessarily have access to high quality water. And so bottled water is the only real alternative. But that, of course will bring this challenge into even sharper relief because as if companies want to sell natural mineral water in countries where these climate risks can be both compounding and increasing simultaneously, obviously some countries are going to be more vulnerable to climate change than others.

(10:25):

This is going to place more pressure on the companies that are operating there to make a business decision In some ways as to whether this particular segment of not every bottle of water has to be marketed as natural spring water. You can market it in other ways, but if you want to sell it as natural spring water, which because of its marketing principles can command a premium in the market, companies are going to have to weigh whether trying to sell into this particular segment is worth the operational challenges that are associated that may be associated with these compounding risks as a result of climate change.

Mike Disabato (11:09):

After a hurricane, foundations can be remade, houses built back up, but when the compounding risks come for business operations, some processes may be too financially burdensome for them to continue. Nestle seems to think so with the selling of its bottled water unit as it continues to face skyrocketing costs due to various climate and community relations problems. And I think this is a really important point to make during what is Climate Week that is happening in New York City right now, by the way, because of these sorts of things are being undervalued by companies and investors, it might be useful to ensure that we're all keeping a better eye on the fecal bacteria runoff going forward. And now to be fair, I kind of set that up there and companies may still be trying to pay attention to all the sustainability data. Now, I say that because there was a report that was published this week by the Harvard Business Review and it looked at whether companies are actually scaling back their climate commitments.

(12:06):

And it found that although a fraction of companies have pulled back, many more are staying the course or even doubling down. They're just doing it quietly. They're calling it a form of green hushing, which I think is quite clever. This isn't surprising to me, especially in light of what cold just discussed for water companies operating in areas of high water stress or heat stress or flooding risks, it's likely that many will need to figure out how to embed what is often referred to as climate hazards that cause compounding events directly into their business models where it can sharpen capital allocation and supply chain management and product design. Because for investors in businesses most impacted by these physical risks, the retreat of analysis and how these risks may impact their business could mean the eventual collapse of the business itself. And that's it for the week. I want to thank you so much for listening, and I want to thank Cole for talking to me about the news with the sustainability twist. If you like what you heard, don't forget to rate and review us and subscribe wherever you get your podcast. Thanks again and talk to you soon.

Speaker 3 (13:39):

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