With a deepening of climate variability and change, the production of soft (agricultural) commodities will be affected by both changes in yields as well as by politically motivated mitigation policies. Therefore, BCG Platinion tasked the Capstone team to analyze and measure the potential political risks of these investments in markets impacted by climate change.
The study presented a quantitative model using the cocoa industry as a case study. The model has three components: the first is production risk, which is the direct impact on commodity supply as a result of changing climates. The second is associated risk -- the projected change in indirect threats to commodity supply, such as resource stress and civil unrest, as a result of changing climates. The third component is financial crisis risk or the projected change in the likelihood of national financial crisis events as a result of the change in commodity supply. The final product is a whitepaper alongside a visualization of the team's results in PowerBI.
The risk model offered promising scenario analysis for cocoa. To continue to evaluate the results, BCG could apply a similar model to other agricultural products for simulation. The model could be packaged by the client for their customers who are involved in cocoa sourcing and procurement as well as for those with investment concerns in the current supplying nations, particularly the changes in revenue, exports, and government stability.