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2024 IAIIAI PAPERS 24|04-FEBRUARY 2024ISSN 2610-9603|ISBN 978-88-9368-318-0USA|European Union|Transatlantic relations|Digital policy|Digital infrastructuresTransatlantic Tech Bridge:Digital Infrastructure and Subsea Cables,a US Perspective by Julia Trhu and Megan RobertskeywordsABSTRACTThe importance of digital infrastructure for global communication and connectivity is only growing.Within this varied sector,subsea cables play a central role in ensuring seamless internet traffic globally.What are the USs strategic and economic interests in digital infrastructure,particularly subsea cables?Within the context of larger economic and geopolitical competition,US policy is multifaceted,from aiming to secure the physical security of infrastructure and guarding against espionage and technology leakage,to boosting economic competitiveness and supporting domestic firms.Overall,digital infrastructure,and undersea cables in particular,are a key element of a larger US strategy of outcompeting China.Although evaluations among allies of the relative threat posed by China and Chinese-owned digital infrastructure vary,broadly shared goals of resiliency,security,and increased connectivity mean there are potential areas for deeper EU-US cooperation,including partnerships with third countries,that align with their respective strategic visions and represent a solid base for further transatlantic coordination.2Transatlantic Tech Bridge:Digital Infrastructure and Subsea Cables,a US Perspective 2024 IAIIAI PAPERS 24|04-FEBRUARY 2024ISSN 2610-9603|ISBN 978-88-9368-318-0Transatlantic Tech Bridge:Digital Infrastructure and Subsea Cables,a US Perspectiveby Julia Trhu and Megan Roberts*IntroductionDigital infrastructure the collection of equipment and systems that connect and power electronic communications and the digital world is the hardware of digital transformation.Since the first telegraph message travelled across the first(analogue)transatlantic cable in 1856,1 this infrastructure has come to include data centres which power the cloud,undersea cables and wireless terrestrial and satellite networks.Digital infrastructure represents the backbone of digital systems and is where the physical and digital worlds meet.The importance of digital infrastructure for todays economies and societies is growing nonlinearly.An estimated 600 billion US dollars will be invested in the sector by 2035.2 For governments worldwide,the achievement of broader social and development goals also increasingly hinges on the deployment,maintenance and dependability of digital infrastructure.Within this broad sector,undersea cables play a crucial role.More than 99 per cent of international internet traffic passes across four hundred subsea cables,although precise calculations are impossible without data on intercontinental satellite traffic.3 New subsea cable investments reached 2.2 billion US dollars from 2016 to 2018,with forecasts predicting investments exceeding 10 billion US dollars by 1 Duncan Geere,“How the First Cable Was Laid Across the Atlantic”,in Wired,18 January 2011,https:/www.wired.co.uk/article/transatlantic-cables.2 Barclay Ballard,“Investment in Digital Infrastructure Shows No Sign of Slowing”,in Infrastructure Investor,28 June 2023,https:/ Alan Mauldin,“Do Submarine Cables Account for Over 99%of Intercontinental Data Traffic?”,in TeleGeography Blog,4 May 2023,https:/ Trhu is a Paris-based Program Manager and Fellow of the Digital Innovation and Democracy Initiative,German Marshall Fund of the United States.Megan Roberts is former Deputy Director of the Digital Innovation and Democracy Initiative,German Marshall Fund of the United States.This paper is part of the project“Building a transatlantic technology bridge:challenges and opportunities”,managed by the Istituto Affari Internazionali(IAI),in partnership with the German Marshall Fund of the United States and Centrum fr Europische Politik,and supported by Fondazione Compagnia di San Paolo.An EU perspective on the topic of digital infrastructures is also available as part of the project(see IAI Papers 24|03).3Transatlantic Tech Bridge:Digital Infrastructure and Subsea Cables,a US Perspective 2024 IAIIAI PAPERS 24|04-FEBRUARY 2024ISSN 2610-9603|ISBN 978-88-9368-318-02024.4 The bodies responsible for laying cable have also evolved over time.The process was initially managed by state-backed companies before being taken over by telecom firms.Today,four“hyperscalers”Google,Meta,Amazon and Microsoft are involved in nearly every new cable laid.Along with classic internet traffic,they are focused on the needs related to AI,cloud services and connecting data centres,which drive up data volumes.5 They work with four major undersea cable firms:the US-based SubCom,the Japanese NEC Corporation,Frances Alcatel Submarine Networks and Chinas HMN Tech.Figure 1|Submarine cable mapSource:TeleGeography,Submarine Cable Map,last updated 19 January 2024,https:/.International communication and the internet as we know it today would not exist without these subsea cables.But the sector is vulnerable to intentional and unintentional disruptions as well as interceptions.These can have massive economic,security and political ramifications.Repair times can also be significant in remote or hard-to-reach locations and repair itself can also introduce vulnerabilities.The first fibre-optic cable was laid in 1988,and the vast majority of internet cables were laid in the postCold War era,a manifestation of the globalisation that characterised this period.But these cables also present a new 4 Natalie Bannerman,“TeleGeography Predicts$10bn Worth of New Subsea Cables by 2024”,in Capacity Media,26 April 2022,https:/ Robert Jacques,“Interview:Orange Wholesale Chief Says Hyperscalers,Cloud,AI Fundamentally Changing Subsea Cable”,in TelcoTitans,26 October 2023,https:/ Tech Bridge:Digital Infrastructure and Subsea Cables,a US Perspective 2024 IAIIAI PAPERS 24|04-FEBRUARY 2024ISSN 2610-9603|ISBN 978-88-9368-318-0domain of tension and competition,with geopolitics descending to the ocean floor.Cable planning and investments are intrinsically tied to political,security and development goals.This paper analyses strategic interests in digital infrastructure from a US perspective,including challenges and opportunities.It then provides an overview of transatlantic cooperation on digital infrastructure,particularly subsea cables,and identifies areas of further cooperation to achieve shared goals.1.US strategic interests in digital infrastructure and its industrial policyThe United States overarching strategic goal is an open,secure,interoperable and global internet,one where US digital leaders can compete(and win).This requires trusted digital infrastructure.US investment in digital infrastructure reveals both domestic and international priorities.The 2021 Bipartisan Infrastructure Bill provides 65 billion US dollars for high-speed internet deployment.6 Its focus is on providing connectivity for low-income households through the Affordable Connectivity Program and reaching underserved rural,agricultural and tribal areas.7 The“Internet for All”initiative manages grants for infrastructure and training.8 In the international development space,digital infrastructure is one of three pillars of USAIDs digital strategy and its digital ecosystem framework.9US firms retain a leading position in the ownership of subsea cables,and along with Japanese and French firms continue to supply the equipment for most projects.Cables were traditionally owned by a consortium of telecom firms,but this model has seen its share diminish with the influx of cables owned by content providers(the hyperscalers).Unlike other digital technologies,the supply chain for the raw materials that make up the cables is not dependent on China.10 Global cooperation takes place through formats like the UNs International Telecommunications Union and multistakeholder arrangements like the International Cable Protection 6 Amanda Hetler,“Broadband Infrastructure Program Explained:The Details”,in TechTarget,12 July 2023,https:/ White House,Fact Sheet:Biden-Harris Administration Celebrates Historic Progress in Rebuilding America Ahead of Two-Year Anniversary of Bipartisan Infrastructure Law,9 November 2023,https:/www.whitehouse.gov/briefing-room/statements-releases/2023/11/09/fact-sheet-biden-harris-administration-celebrates-historic-progress-in-rebuilding-america-ahead-of-two-year-anniversary-of-bipartisan-infrastructure-law.8 See the official website:Internet for All,https:/www.internetforall.gov.9 US Agency for International Development(USAID),Digital Ecosystem Framework(factsheet),2022,https:/www.usaid.gov/digital-development/digital-ecosystem-framework.10 Julia Brackup et al.,Alternative Futures for Digital Infrastructure.Insights and Considerations for the Department of Defense,Santa Monica,RAND,2023,p.20,https:/www.rand.org/pubs/research_reports/RRA1859-1.html.5Transatlantic Tech Bridge:Digital Infrastructure and Subsea Cables,a US Perspective 2024 IAIIAI PAPERS 24|04-FEBRUARY 2024ISSN 2610-9603|ISBN 978-88-9368-318-0Committee.The United Nations Convention on the Law of the Sea(UNCLOS)provides an important legal framework for ocean policy and undersea cables,including cable protection zones and a dispute resolution framework.The US,however,has failed to ratify UNCLOS for decades and even in the case of US ratification,credible enforcement would be difficult.11Geopolitics and rising concerns about China have upended the world of subsea cables.Digital infrastructure,and undersea cables in particular,fit into a wider strategy for the US and are a key element of“outcompeting”China.This is leading to what has been dubbed a“subsea cold war”.12 Concerns are multifaceted and overlapping,including the physical security of infrastructure,espionage,economic competitiveness and support for domestic firms,fears of technology leakage and geopolitical competition.In promoting the view that“the digital backbones of the modern economy must be open,trusted,interoperable,reliable,and secure”,13 US strategy is highly focused on countering Chinas“digital silk road”.Digital infrastructure is critical,but also a potential vector for insecurity and subject to disruptions,both accidental and deliberate.But attribution and assessing conflicting motivations among potential adversaries can be difficult.There is still significant uncertainty around cyberthreats and subsea cables,with limited publicly available information or attribution.The majority of cable faults around a hundred per year are attributable to accidental errors,such as damage from fishing vessels,or geologic incidents.14 But the risk and fear of state-directed cyber-attacks or physical sabotage is rising.Many examples remain hypothetical;and concrete details or attribution are classified or unknown.One of the few known events,a 2022 cyber-attack in Hawaii that the Department of Homeland Security claimed to have foiled,was merely attributed to an“international hacking group”.15 Chinese ships have been accused of damaging cables in the Taiwan straits as part of a pressure campaign on the island.16The US is particularly concerned about potential for espionage from adversaries like China and Russia.Tapping into and filtering the enormous quantities of information on subsea cables is extremely difficult,especially at great depths,11 John Kraus,“Unmoored from the UN:The Struggle to Ratify UNCLOS in the United States”,in SAIS Review,26 June 2023,https:/saisreview.sais.jhu.edu/?p=4774.12 Alan Mauldin,The Subsea Cold War,presentation at the Submarine Networks World,Singapore,28 September 2023,https:/ White House,National Security Strategy,October 2022,p.33,https:/nssarchive.us/national-security-strategy-2022.14 Alan Mauldin,“Cable Breakage:When and How Cables Go Down”,in TeleGeography Blog,3 May 2017,https:/ Agents Disrupted Cyberattack Targeting Phone,Internet Infrastructure on Oahu”,in Hawaii News Now,12 April 2022,https:/ Huizhong Wu and Johnson Lai,“Taiwan Suspects Chinese Ships Cut Islands Internet Cables”,in AP News,18 April 2023,https:/ Tech Bridge:Digital Infrastructure and Subsea Cables,a US Perspective 2024 IAIIAI PAPERS 24|04-FEBRUARY 2024ISSN 2610-9603|ISBN 978-88-9368-318-0and only a few countries likely have such capabilities.Landing stations where cables come ashore,however,have been identified as potential vulnerabilities,where lax security could allow for monitoring or tapping of the cables.The US can illustrate its concerns about growing control of infrastructure by adversaries by pointing to cases like the Federated States of Micronesia,where China pressured the government to grant it control of cables and telecom infrastructure via a Memorandum of Understanding.17 The point here is that Chinese infrastructure investments through the digital silk road will lead to de-facto control and facilitate espionage.Cost-reduction measures by cable owners have also led to increased deployment of remote network management systems,which introduce new vulnerabilities to hacking or sabotage since they are connected to the internet.18The US has responded to these concerns with legislation like the Secure and Trusted Communications Networks Act of 2019,which charged the Federal Communications Commission with carrying out the complex rip-and-replace process for Huawei-made infrastructure domestically.19 The US has also expressed concerns about Europes reliance on 5G infrastructure from Huawei.20 The National Security Strategy released in October 2022 warns that autocratic governments“leverage access to their markets and control of global digital infrastructure for coercive purposes”and cites China as a source of“untrusted digital infrastructure”.21The US has also acted to ensure continued market dominance by US and allied firms.Between 2015 and 2019,Chinese investments through the digital silk road led to control by Huawei Marine(which became HMN Tech in 2019)of about 15 per cent of the global market.22 Sanctions were placed on HMN Tech in 2021,citing its“intention to acquire American technology to help modernize Chinas Peoples Liberation Army”.23 This issue also predates the current Biden Administration.In addition to sanctions placed on Huawei,President Trumps“Executive Order on Establishing the Committee for the Assessment of Foreign Participation in the United States Telecommunications Services Sector”provided structure to an interagency team known as“Team Telecom”charged with reviewing foreign 17 Insikt Group,“The Escalating Global Risk Environment for Submarine Cables”,in Recorded Future,27 June 2023,p.18,https:/ Ibid.,p.19.19 Cecilia Kang,“Rip and Replace:The Tech Cold War Is Upending Wireless Carriers”,in The New York Times,9 May 2023,https:/ Mathieu Pollet and John Hendel,“The West Is on a World Tour Against Huawei”,in Politico,28 November 2023,https:/www.politico.eu/?p=3926817.21 White House,National Security Strategy,cit.,p.10.22 Anna Gross et al.,“How the US Is Pushing China Out of the Internets Plumbing”,in Financial Times,13 June,2023,https:/ Joe Brock,“U.S.and China Wage War Beneath the Waves:Over Internet Cables”,in Reuters Special Reports,24 March 2023,https:/ Tech Bridge:Digital Infrastructure and Subsea Cables,a US Perspective 2024 IAIIAI PAPERS 24|04-FEBRUARY 2024ISSN 2610-9603|ISBN 978-88-9368-318-0investment in telecom and broadcast firms.24 Run by the Department of Justices National Security Division,it makes licensing recommendations to the Federal Communications Commission with the goal of ensuring that no cable directly connects the US and the Chinese mainland or Hong Kong.25 The US Congress has also been somewhat vocal on the issue.For example,the Undersea Cable Control Act passed the House in March 2023.26Recent years have therefore seen significant shifts in undersea cable investment,with many new cables rerouted to avoid China and the South China Sea.27 While warnings of an undersea splinternet may be exaggerated,the sector is nevertheless seeing important shifts in investment,particularly for transpacific cables.From 2016 to 2020,75 per cent of cables included at least one Chinese owner.Projections for 20212025 plummet to 0 per cent(see Figure 2).Significant reductions are apparent in other Asia connections as well.Figure 2|Share of cables entering service with at least one Chinese ownerNotes:Chinese owners include:China Telecom,China Mobile,China Unicom,China Mobile,PCCW,PEACE Cable.Cable year based on RFS.Source:Alan Mauldin,The Subsea Cold War,cit.24 White House,Executive Order No.13913 of 4 April 2020:Establishing the Committee for the Assessment of Foreign Participation in the United States Telecommunications Services Sector,https:/www.federalregister.gov/documents/2020/04/08/2020-07530/establishing-the-committee-for-the-assessment-of-foreign-participation-in-the-united-states.25 Joe Brock,“U.S.and China Wage War Beneath the Waves”,cit.26 Brian Mast,“Mast Bill to Limit Chinas Ability to Develop Critical Undersea Cables Passes House”,in Brian Mast Press Releases,27 March 2023,https:/mast.house.gov/2023/3/mast-bill-to-limit-china-s-ability-to-develop-critical-undersea-cables-passes-house.27 Alan Mauldin,The Subsea Cold War,cit.8Transatlantic Tech Bridge:Digital Infrastructure and Subsea Cables,a US Perspective 2024 IAIIAI PAPERS 24|04-FEBRUARY 2024ISSN 2610-9603|ISBN 978-88-9368-318-0The US government has also intervened in cases of Chinese involvement in infrastructure projects and exerted pressure which has led to cancellation of cable initiatives or contracts if awarded to Chinese firms.For example,a 2018 proposed consortium led by Amazon,Meta and China Mobile met with opposition from Washington.US security concerns remained even following China Mobiles departure,and the project was shelved despite much of the cable having already been laid.28 The 600 million US dollar SeaWeMe-6 cable connecting Singapore to France was awarded to the USs SubCom over HMN Tech following diplomatic pressure and incentives like training grants to local telecom firms from the US Trade and Development Agency.29 At the same time,this pressure,along with sanctions,has influenced cable-building endeavours that do not include US investors or connect geographically to the US.30Such events illustrate the strategic competitive and economic interests at stake,as technology becomes a key site of geopolitical competition.In order to counter China,the United States is working to build a network of partnerships on digital infrastructure.The US CABLES programme provides capacity building and technical assistance to members of the Quad alliance in the Indo-Pacific.31 The Partnership for Global Infrastructure and Investment(PGII)through the G7 aims to offer an alternative to Chinas Belt and Road Investments,32 and included cables as part of a recent PGII announcement on the sidelines of the G20.33 The US also launched the Trilateral Partnership for Infrastructure Investment with Australia and Japan in 2018.34 The NATO undersea infrastructure coordination cell,launched in 2023,coordinates between military,civilian and industry interests in subsea infrastructure to increase security.35 The State Departments 2020 Clean Network Initiative,whose scope extends beyond subsea cables,created a set of shared principles and practices for countries and companies with the goal of blocking Chinese market dominance.3628 Anna Gross et al.,“How the US Is Pushing China Out of the Internets Plumbing”,cit.29 Joe Brock,“U.S.and China Wage War Beneath the Waves”,cit.30 Anna Gross et al.,“How the US Is Pushing China Out of the Internets Plumbing”,cit.31 White House,Quad Leaders Summit Fact Sheet,20 May 2023,https:/www.whitehouse.gov/briefing-room/statements-releases/2023/05/20/quad-leaders-summit-fact-sheet.32 White House,Fact Sheet:President Biden and G7 Leaders Formally Launch the Partnership for Global Infrastructure and Investment,26 June 2022,https:/www.whitehouse.gov/briefing-room/statements-releases/2022/06/26/fact-sheet-president-biden-and-g7-leaders-formally-launch-the-partnership-for-global-infrastructure-and-investment.33 White House,Fact Sheet:President Biden and Prime Minister Modi Host Leaders on the Partnership for Global Infrastructure and Investment,9 September 2023,https:/www.whitehouse.gov/briefing-room/statements-releases/2023/09/09/fact-sheet-president-biden-and-prime-minister-modi-host-leaders-on-the-partnership-for-global-infrastructure-and-investment.34 Mari Yamaguchi,“Japan,Australia,US to Fund Undersea Cable Connection in Micronesia to Counter Chinas Influence”,in AP News,7 June 2023,https:/ NATO,NATO Stands Up Undersea Infrastructure Information Cell,15 February 2023,https:/www.nato.int/cps/en/natohq/news_211919.htm.36 Harvard Business Review,“How the Clean Network Changed the Future of Global Technology Competition”,in Cold Call,Episode 158(5 October 2021),https:/hbr.org/podcast/2021/10/how-the-9Transatlantic Tech Bridge:Digital Infrastructure and Subsea Cables,a US Perspective 2024 IAIIAI PAPERS 24|04-FEBRUARY 2024ISSN 2610-9603|ISBN 978-88-9368-318-02.Challenges and opportunitiesThe USs vision of a global internet runs up against several important challenges.De-risking or decoupling from China or untangling the networks of cables built up through years of collaboration due to security and economic concerns may be easier said than done.Internet traffic often travels on China-owned cables and data continues to flow between the two countries regardless of whether the cable was laid by a US or Chinese supplier.37Figure 3|Number of directly connected Chinese and US IP network operatorsSource:Anna Gross et al.,“How the US Is Pushing China Out of the Internets Plumbing”,cit.China has also been successful in generating digital partnerships worldwide.This digital diplomacy is particularly notable in Africa in financing of digital infrastructure.38 But among US partners and allies,evaluations of the relative threat posed by China and Chinese-owned digital infrastructure vary.Many investments in this sector are strictly commercial,and require coordination across a wide range of partners and equities.Almost all global internet traffic,including for public bodies,relies on cable owned by private firms.39 These private firms can be hesitant about sharing data with public entities via bodies like the clean-network-changed-the-future-of-global-technology-competition.37 Alan Mauldin,The Subsea Cold War,cit.38 Joseph B.Keller,“The Next Superpower Battlefield Could Be Under the Sea in Africa”,in Foreign Policy,10 March 2023,https:/ Jill C.Gallagher,“Undersea Telecommunication Cables:Technology Overview and Issues for Congress”,in CRS Reports,13 September 2022,https:/crsreports.congress.gov/product/details?prodcode=R47237.10Transatlantic Tech Bridge:Digital Infrastructure and Subsea Cables,a US Perspective 2024 IAIIAI PAPERS 24|04-FEBRUARY 2024ISSN 2610-9603|ISBN 978-88-9368-318-0Department of Homeland Securitys Cybersecurity and Infrastructure Security Agency,founded in 2016.40Amidst these real challenges,however,lie important opportunities.The US hopes to lead and stands to capitalise on the massive boost in investment in digital infrastructure,especially as US-based firms continue to dominate across digital technologies and services generally.Subsea cables are critical for connecting the data centres that power digital advances,including for US tech companies.While these firms incentives are not always aligned with the US governments strategic concerns,their global success is still part of the USs overall strategy on digital infrastructure,trade and development.Increased investment in cables can also boost cooperation with third countries to increase connectivity in areas with the greatest digital divide,helping integrate them into the global economy and achieve wider development goals.3.EU-US cooperationIn addition to the global initiatives cited above,the United States and European Union have also cooperated through dedicated venues.The EU-US Trade and Technology Council(TTC)has been an important forum for coordination on digital infrastructure and subsea cables to meet shared goals.The evolution of language from the official TTC statements shows increasing focus on the issue.Of the ten working groups announced following the first meeting in September 2021 in Pittsburgh,Working Group 4 on information and communications technology(ICT)security and competitiveness was tasked with“ensuring security,diversity,interoperability and resilience across the ICT supply chain”,finding avenues for joint public financing for secure and resilient digital infrastructure in third countries,and ensuring cooperation on 5G and 6G systems and beyond.41 A dedicated taskforce on the issue was launched following the second meeting in May 2022 in Saclay,France.This led to the announcement in December 2022 of joint efforts on secure digital connectivity with Jamaica and Kenya,followed by further partnerships with Costa Rica and the Philippines announced in Lule,Sweden in May 2023.The December 2022 statement references the intended focus on subsea cable connectivity and security,the development of alternate routes connecting Europe,Asia and North America,and supplier diversification efforts of Working Group 4 on ICT security and competitiveness.42 The May 2023 TTC statement included aims to“advance cooperation to promote the selection of trusted subsea 40 US Department of Homeland Security-Office of Inspector General,“DHS Made Limited Progress to Improve Information Sharing Under the Cybersecurity Act in Calendar Years 2017 and 2018”,in OIG Reports,25 September 2020,https:/www.oig.dhs.gov/node/6120.41 European Commission website:Working Group 4:ICT Security and Competitiveness,https:/futurium.ec.europa.eu/en/group/65.42 EU-US Trade and Technology Council,EU-US Joint Statement of the Trade and Technology Council,5 December 2022,https:/ec.europa.eu/commission/presscorner/detail/en/statement_22_7516.11Transatlantic Tech Bridge:Digital Infrastructure and Subsea Cables,a US Perspective 2024 IAIIAI PAPERS 24|04-FEBRUARY 2024ISSN 2610-9603|ISBN 978-88-9368-318-0cable providers for new cable projects in particular for intercontinental ICT cable projects that promote trustworthy suppliers,reduce latency and enhance route diversity”and the intent to“continue discussions on ensuring transatlantic subsea cables connectivity and security,including on alternate routes that connect Europe,North America and Asia”.43This language mirrors that of the 2023 G7 Leaders communique,which underlined shared goals of“cooperation within the G7 and with like-minded partners to support and enhance network resilience by measures such as extending secure routes of submarine cables”including“supplier diversification efforts in ICTS supply chains”and further discussion of“market trends towards open,interoperable approaches,alongside secure,resilient and established architecture in a technology neutral way”.44Geopolitical tensions and attempts to avoid Chinese suppliers have led to cooperation on new routes and cable development.Tensions with Russia,for example,led to the scrapping of a proposed cable running along the Russian Arctic coastline.Instead,the first Artic cable will connect the Nordic countries to Greenland,Canada and Alaska,ending in Japan,and involve a consortium of Finnish,American and Japanese firms.45 This type of project also illustrates attempts to chart new routes as climate change affects the calculus of laying cable through the Arctic.46The EU and US,however,do not completely see eye to eye on this issue.Some EU member states have shown more willingness to working with Chinese suppliers.The 2022 Peace cable connecting France to Pakistan via Kenya,for example,was entirely financed and built by Chinese firms.47 While the EU and US have managed to identify third countries with which to cooperate,they hold different perspectives on the relative value of specific projects and different risk perceptions regarding suppliers.The future of the TTC is also in question.The planned December 2023 meeting was postponed until January 2024,with a potentially final TTC to be held in April 2024,and the political will required to sustain the pace of such an initiative 43 EU-US Trade and Technology Council,Joint Statement EU-US Trade and Technology Council of 31 May 2023 in Lulea,Sweden,https:/ec.europa.eu/commission/presscorner/detail/en/statement_23_2992.44 G7,G7 Hiroshima Leaders Communiqu,20 May 2023,point 39,http:/www.g7.utoronto.ca/summit/2023hiroshima/230520-communique.html.45 Anne Kauranen,“Arctic Data Cable Linking Europe to Japan Secures First Investment”,in Reuters,2 December 2022,https:/ Isabelle Bousquette,“What Will It Take to Connect the Arctic?$1.2 Billion,10,000 Miles of Fiber-Optic Cable,and Patience”,in The Wall Street Journal,10 March 2023,https:/ Anne Cagan,“Entre les Etats-Unis et la Chine,lpre bataille des cbles sous-marins”,in LExpress,28 September 2022,https:/www.lexpress.fr/economie/high-tech/entre-les-etats-unis-et-la-chine-l-apre-bataille-des-cables-sous-marins_2180913.html.12Transatlantic Tech Bridge:Digital Infrastructure and Subsea Cables,a US Perspective 2024 IAIIAI PAPERS 24|04-FEBRUARY 2024ISSN 2610-9603|ISBN 978-88-9368-318-0may be in short supply in a year of EU Parliamentary and US Presidential elections.4.Future prospects for EU-US cooperationThe importance of digital infrastructure and broadly shared goals of resiliency and increased connectivity mean there are potential areas for deeper EU-US cooperation that align with their respective strategic visions.The following are suggestions for possible collaboration and alignment:1.The EU and US should build on the TTCs achievements to date and strengthen digital diplomacy.Existing cooperation to expand digital cable infrastructure should be strengthened,either within or outside the TTC.Partnerships can continue to be built with individual countries,including third-country partnership opportunities.In some cases,these partnerships will overlap with broader development goals,helping increase connectivity in Global South countries.In others,partnerships will help respond to security concerns,and increase redundancy across networks to increase overall resiliency.Digital capacity-building efforts can be tied to efforts to increase the security of digital infrastructure,and this foundation can be used to build a shared assessment of trusted providers.2.There is a need to boost information sharing and coordinated planning related to subsea cables,both for the transatlantic partnership and with a larger group of like-minded countries.This includes greater understanding of possible cyber-threats,and new vulnerabilities tied to the changing nature of cable deployment and management.Doing so will require balancing sometimes competing concerns from government,with a focus on cybersecurity and geopolitical risks,and industry,whose threat perception is more focused on physical disruptions.Coordination requires input from the broader group of stakeholders,from the various firms qualified as industry(manufacturers,small and large cable or telecom firms,and hyperscalers)and local,state and federal governments.This coordination should also include contingency planning for major disruptions.Shared information can itself serve as a deterrent for malicious attacks.48 Overall,coordination will ensure that efforts to combat threats do not harm overall connectivity by ensuring various stakeholders are not inadvertently working at cross-purposes.3.The EU and US should coordinate and deepen investment in global cooperation formats like the International Telecommunications Union and multistakeholder arrangements like the International Cable Protection Committee(ICPC)to improve resilience and security.Greater coordination in the ICPC,in particular,would have the benefit of strengthening ties with its private-sector members.49 Greater buy-in 48 See Kevin Frazier,“Policy Proposals for the United States to Protect the Undersea Cable System”,in Case Western Reserve Journal of Law,Technology&the Internet,Vol.13,No.1(2022),https:/scholarlycommons.law.case.edu/jolti/vol13/iss1/1.49 See ICPC website:https:/www.iscpc.org.13Transatlantic Tech Bridge:Digital Infrastructure and Subsea Cables,a US Perspective 2024 IAIIAI PAPERS 24|04-FEBRUARY 2024ISSN 2610-9603|ISBN 978-88-9368-318-0from all members can help augment the above-mentioned recommendations on third-country cooperation and the information-sharing necessary to set clearer standards for security,including cable-laying and repair.Existing frameworks such as the 2020 recommendation on the governance of infrastructure from the Organisation for Economic Cooperation and Development can help guide this coordination.50 Best practices agreed through these existing multistakeholder arrangements can help guide the coordination initiatives recommended above and serve as a central repository for information and expertise.4.There is an opportunity to close holes in both domestic and international legal frameworks governing subsea cables.US government authority is relatively fractured across agencies,and UNCLOS is unlikely to be ratified anytime soon(if ever).Cables can be owned by multiple entities subject to different jurisdictions.Legal scholars continue to debate the unresolved issue of international law as it pertains to the protection of subsea cables,especially in wartime,as cables could be classified as serving both civilian and military objectives,opening up potential status as legitimate targets.An international treaty should serve as the ultimate goal.But in the meantime,further efforts to provide joint explanations of understanding of international law related to subsea cables could serve as a building block for closing these holes.5.As cable infrastructure expands rapidly,physical threats also multiply,and will require new understanding and approaches in order to ensure network resiliency.Transatlantic joint funding and coordination with third countries could help expand understanding of underwater seismic activity,tsunami and other natural disasters that can affect the undersea cable infrastructure.The accelerating climate crisis heightens the importance of areas that are both susceptible to natural disasters and geopolitically important.51 There is potential for increased cooperation with countries with highest risk of natural disasters to ensure security of critical infrastructure.Existing or new third-country ICT partnerships should make sure to account for climate risks and can tie cable security into broader mitigation efforts.6.Finally,joint research initiatives should advance investigation into possible or speculative future use cases,such as power-over-fibre.52 Another possible avenue for joint research includes quantum-safe encryption algorithms.While optical layer encryption or VPNs can secure data traveling over cables and protect against possible interception or espionage,decryption via quantum computing represents 50 OECD,OECD Recommendation on the Governance of Infrastructure,17 July 2020,https:/www.oecd.org/gov/infrastructure-governance/recommendation.51 See Garrett Hinck,“Cutting the Cord:The Legal Regime Protecting Undersea Cables”,in Lawfare,21 November 2017,https:/www.lawfaremedia.org/article/cutting-cord-legal-regime-protecting-undersea-cables.52 Bruce M.Howe et al.,“SMART Subsea Cables for Observing the Earth and Ocean,Mitigating Environmental Hazards,and Supporting the Blue Economy”,in Frontiers in Earth Science,Vol.9(March 2022),Article 775544,https:/doi.org/10.3389/feart.2021.775544.14Transatlantic Tech Bridge:Digital Infrastructure and Subsea Cables,a US Perspective 2024 IAIIAI PAPERS 24|04-FEBRUARY 2024ISSN 2610-9603|ISBN 978-88-9368-318-0a possible future risk.The National Institute of Standards and Technology is working on post-quantum(quantum-resistant)cryptography standards,which will likely become the global benchmark,but should further involve European researchers,many of whom are leaders in the field.53 Overall,the EU and US should ensure that their research communities can coordinate on new pathbreaking technologies,including ensuring security and reliability from the start.54While todays global communications may appear fast,seamless and intangible,their reliance on hardware and infrastructure,especially subsea cables,and the physical vulnerabilities they pose and geopolitical tensions they stoke,should never be underestimated.While the EU and US continue to cooperate and largely lead in subsea cables,further cooperation can help fill the gaps.This is crucial to assuage growing security concerns,including guarding against espionage.Cooperation can also help meet shared development goals by partnering with third countries to improve cable access to underserved areas.Although differences remain,shared interest in resiliency and security are a solid base for further transatlantic coordination.Updated 26 February 202453 Utilities One,Understanding Power Transmission in Fiber Optic and Copper Cables,15 September 2023,https:/ Alina Clasen,“EU Quantum Researchers Set to Give Up IP Rights in Standard-Setting Race”,in Euractiv,11 January 2024,https:/ Tech Bridge:Digital Infrastructure and Subsea Cables,a US Perspective 2024 IAIIAI PAPERS 24|04-FEBRUARY 2024ISSN 2610-9603|ISBN 978-88-9368-318-0ReferencesBarclay Ballard,“Investment in Digital Infrastructure Shows No Sign of Slowing”,in Infrastructure Investor,28 June 2023,https:/ Bannerman,“TeleGeography Predicts$10bn Worth of New Subsea Cables by 2024”,in Capacity Media,26 April 2022,https:/ Bousquette,“What Will It Take to Connect the Arctic?$1.2 Billion,10,000 Miles of Fiber-Optic Cable,and Patience”,in The Wall Street Journal,10 March 2023,https:/ Brackup et al.,Alternative Futures for Digital Infrastructure.Insights and Considerations for the Department of Defense,Santa Monica,RAND,2023,https:/www.rand.org/pubs/research_reports/RRA1859-1.htmlJoe Brock,“U.S.and China Wage War Beneath the Waves:Over Internet Cables”,in Reuters Special Reports,24 March 2023,https:/ Cagan,“Entre les Etats-Unis et la Chine,lpre bataille des cbles sous-marins”,in LExpress,28 September 2022,https:/www.lexpress.fr/economie/high-tech/entre-les-etats-unis-et-la-chine-l-apre-bataille-des-cables-sous-marins_2180913.htmlAlina Clasen,“EU Quantum Researchers Set to Give Up IP Rights in Standard-Setting Race”,in Euractiv,11 January 2024,https:/ Trade and Technology Council,EU-US Joint Statement of the Trade and Technology Council,5 December 2022,https:/ec.europa.eu/commission/presscorner/detail/en/statement_22_7516EU-US Trade and Technology Council,Joint Statement EU-US Trade and Technology Council of 31 May 2023 in Lulea,Sweden,https:/ec.europa.eu/commission/presscorner/detail/en/statement_23_2992Kevin Frazier,“Policy Proposals for the United States to Protect the Undersea Cable System”,in Case Western Reserve Journal of Law,Technology&the Internet,Vol.13,No.1(2022),https:/scholarlycommons.law.case.edu/jolti/vol13/iss1/1G7,G7 Hiroshima Leaders Communiqu,20 May 2023,http:/www.g7.utoronto.ca/summit/2023hiroshima/230520-communique.html16Transatlantic Tech Bridge:Digital Infrastructure and Subsea Cables,a US Perspective 2024 IAIIAI PAPERS 24|04-FEBRUARY 2024ISSN 2610-9603|ISBN 978-88-9368-318-0Jill C.Gallagher,“Undersea Telecommunication Cables:Technology Overview and Issues for Congress”,in CRS Reports,13 September 2022,https:/crsreports.congress.gov/product/details?prodcode=R47237Duncan Geere,“How the First Cable Was Laid Across the Atlantic”,in Wired,18 January 2011,https:/www.wired.co.uk/article/transatlantic-cablesAnna Gross et al.,“How the US Is Pushing China Out of the Internets Plumbing”,in Financial Times,13 June,2023,https:/ Business Review,“How the Clean Network Changed the Future of Global Technology Competition”,in Cold Call,Episode 158(5 October 2021),https:/hbr.org/podcast/2021/10/how-the-clean-network-changed-the-future-of-global-technology-competitionAmanda Hetler,“Broadband Infrastructure Program Explained:The Details”,in TechTarget,12 July 2023,https:/ Hinck,“Cutting the Cord:The Legal Regime Protecting Undersea Cables”,in Lawfare,21 November 2017,https:/www.lawfaremedia.org/article/cutting-cord-legal-regime-protecting-undersea-cablesBruce M.Howe et al.,“SMART Subsea Cables for Observing the Earth and Ocean,Mitigating Environmental Hazards,and Supporting the Blue Economy”,in Frontiers in Earth Science,Vol.9(March 2022),Article 775544,https:/doi.org/10.3389/feart.2021.775544Insikt Group,“The Escalating Global Risk Environment for Submarine Cables”,in Recorded Future,27 June 2023,https:/ Jacques,“Interview:Orange Wholesale Chief Says Hyperscalers,Cloud,AI Fundamentally Changing Subsea Cable”,in TelcoTitans,26 October 2023,https:/ Kang,“Rip and Replace:The Tech Cold War Is Upending Wireless Carriers”,in The New York Times,9 May 2023,https:/ Kauranen,“Arctic Data Cable Linking Europe to Japan Secures First Investment”,in Reuters,2 December 2022,https:/ B.Keller,“The Next Superpower Battlefield Could Be Under the Sea in Africa”,in Foreign Policy,10 March 2023,https:/ Tech Bridge:Digital Infrastructure and Subsea Cables,a US Perspective 2024 IAIIAI PAPERS 24|04-FEBRUARY 2024ISSN 2610-9603|ISBN 978-88-9368-318-0africa-china-russia-subsea-cablesJohn Kraus,“Unmoored from the UN:The Struggle to Ratify UNCLOS in the United States”,in SAIS Review,26 June 2023,https:/saisreview.sais.jhu.edu/?p=4774Brian Mast,“Mast Bill to Limit Chinas Ability to Develop Critical Undersea Cables Passes House”,in Brian Mast Press Releases,27 March 2023,https:/mast.house.gov/2023/3/mast-bill-to-limit-china-s-ability-to-develop-critical-undersea-cables-passes-houseAlan Mauldin,“Cable Breakage:When and How Cables Go Down”,in TeleGeography Blog,3 May 2017,https:/ Mauldin,“Do Submarine Cables Account for Over 99%of Intercontinental Data Traffic?”,in TeleGeography Blog,4 May 2023,https:/ Mauldin,The Subsea Cold War,presentation at the Submarine Networks World,Singapore,28 September 2023,https:/ Stands Up Undersea Infrastructure Information Cell,15 February 2023,https:/www.nato.int/cps/en/natohq/news_211919.htmOECD,OECD Recommendation on the Governance of Infrastructure,17 July 2020,https:/www.oecd.org/gov/infrastructure-governance/recommendationMathieu Pollet and John Hendel,“The West Is on a World Tour Against Huawei”,in Politico,28 November 2023,https:/www.politico.eu/?p=3926817US Agency for International Development(USAID),Digital Ecosystem Framework(factsheet),2022,https:/www.usaid.gov/digital-development/digital-ecosystem-frameworkUS Department of Homeland Security-Office of Inspector General,“DHS Made Limited Progress to Improve Information Sharing Under the Cybersecurity Act in Calendar Years 2017 and 2018”,in OIG Reports,25 September 2020,https:/www.oig.dhs.gov/node/6120Utilities One,Understanding Power Transmission in Fiber Optic and Copper Cables,15 September 2023,https:/ House,Executive Order No.13913 of 4 April 2020:Establishing the Committee for the Assessment of Foreign Participation in the United States Telecommunications Services Sector,https:/www.federalregister.gov/18Transatlantic Tech Bridge:Digital Infrastructure and Subsea Cables,a US Perspective 2024 IAIIAI PAPERS 24|04-FEBRUARY 2024ISSN 2610-9603|ISBN 978-88-9368-318-0documents/2020/04/08/2020-07530/establishing-the-committee-for-the-assessment-of-foreign-participation-in-the-united-statesWhite House,Fact Sheet:Biden-Harris Administration Celebrates Historic Progress in Rebuilding America Ahead of Two-Year Anniversary of Bipartisan Infrastructure Law,9 November 2023,https:/www.whitehouse.gov/briefing-room/statements-releases/2023/11/09/fact-sheet-biden-harris-administration-celebrates-historic-progress-in-rebuilding-america-ahead-of-two-year-anniversary-of-bipartisan-infrastructure-lawWhite House,Fact Sheet:President Biden and G7 Leaders Formally Launch the Partnership for Global Infrastructure and Investment,26 June 2022,https:/www.whitehouse.gov/briefing-room/statements-releases/2022/06/26/fact-sheet-president-biden-and-g7-leaders-formally-launch-the-partnership-for-global-infrastructure-and-investmentWhite House,Fact Sheet:President Biden and Prime Minister Modi Host Leaders on the Partnership for Global Infrastructure and Investment,9 September 2023,https:/www.whitehouse.gov/briefing-room/statements-releases/2023/09/09/fact-sheet-president-biden-and-prime-minister-modi-host-leaders-on-the-partnership-for-global-infrastructure-and-investmentWhite House,National Security Strategy,October 2022,https:/nssarchive.us/national-security-strategy-2022White House,Quad Leaders Summit Fact Sheet,20 May 2023,https:/www.whitehouse.gov/briefing-room/statements-releases/2023/05/20/quad-leaders-summit-fact-sheetHuizhong Wu and Johnson Lai,“Taiwan Suspects Chinese Ships Cut Islands Internet Cables”,in AP News,18 April 2023,https:/ Yamaguchi,“Japan,Australia,US to Fund Undersea Cable Connection in Micronesia to Counter Chinas Influence”,in AP News,7 June 2023,https:/ Tech Bridge:Digital Infrastructure and Subsea Cables,a US Perspective 2024 IAIIAI PAPERS 24|04-FEBRUARY 2024ISSN 2610-9603|ISBN 978-88-9368-318-0Latest IAI PAPERSDirector:Riccardo Alcaro(r.alcaroiai.it)Istituto Affari Internazionali(IAI)The Istituto Affari Internazionali(IAI)is a private,independent non-profit think tank,founded in 1965 on the initiative of Altiero Spinelli.IAI seeks to promote awareness of international politics and to contribute to the advancement of European integration and multilateral cooperation.Its focus embraces topics of strategic relevance such as European integration,security and defence,international economics and global governance,energy,climate and Italian foreign policy;as well as the dynamics of cooperation and conflict in key geographical regions such as the Mediterranean and Middle East,Asia,Eurasia,Africa and the Americas.IAI publishes an English-language quarterly(The International Spectator),an online webzine(AffarInternazionali),two book series(Trends and Perspectives in International Politics and IAI Research Studies)and some papers series related to IAI research projects(Documenti IAI,IAI Papers,etc.).Via dei Montecatini,17-I-00186 Rome,ItalyT 39 06 6976831iaiiai.itwww.iai.it24|04Julia Trhu and Megan Roberts,Transatlantic Tech Bridge:Digital Infrastructure and Subsea Cables,a US Perspective24|03Anselm Ksters,Andr Wolf and Eleonora Poli,Challenges to Transatlantic Digital Infrastructure:An EU Perspective24|02Nicola Casarini,The Future of the Belt and Road in Europe:How Chinas Connectivity Project is Being Reconfigured across the Old Continent and What It Means for the Euro-Atlantic Alliance24|01Federica Marconi,Max Mnchmeyer and Irene Paviotti,The State of EU-US Digital and Energy Cooperation23|23Leila Alieva,De-colonising the Azerbaijan-Armenian Conflict:Breaking the Knot of Security and Dependence23|22Jing Men,The Chinese Perspectives on the EUs Policy towards China23|21Rend Al-Rahim,Transitional Justice in Iraq:The Challenges of National Healing and Recovery23|20Marina Rudyak,China and the Global South:Many Initiatives,One Narrative23|19Tanina Zappone,Reinventing Soft Power:The Strong Impact of Chinas Soft Power“Shortcomings”on the Global South23|18Pier Paolo Raimondi,Italy and 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Impact Report 20222023 Our Purpose&Impact Report McDonalds Corporation Our purpose is to feed and foster communities.As the leading global foodservice retailer,we believe its our responsibility to make a positive impact on the world.Were driving that impact by living our purpose.The actions we continue to take today across our food,people,communities and our planet will help contribute to building a better business and a more trusted brand for generations to come.One of these actions is reporting on our environmental and social activities.McDonalds Corporation Purpose&Impact Report 202220232Our PlanetFood Quality&SourcingJobs,Inclusion&EmpowermentCommunity ConnectionSASB Index IntroductionWhats Inside Introduction McDonalds is the global leading foodservice retailer,with more than 40,000 locations in over 100 countries helping feed millions of customers every day.Our System works as one to feed and foster the communities we serve.Whether we are helping deliver more sustainable food systems or building an inclusive workplace,we believe there has never been a more important moment to work together to advance collective impact.4 A Message From Our CEO 6 Who We Are 7 The McDonalds System 8 Our Impact Strategy&Approach Our Planet Were acting now to deliver on our climate ambitions,protect natural resources,accelerate solutions to reduce waste and transition to more sustainable packaging and toy materials.19 Climate Action 22 Packaging,Toys&Waste 26 Nature,Forests&Water Food Quality&Sourcing Were working toward creating a secure,more sustainable future for food by advancing safety and quality,prioritizing animal health and welfare and making balanced meals more accessible to families across the world.31 Food Safety 34 Nutrition&Marketing Practices 38 Responsible Sourcing 41 Animal Health&Welfare and Responsible Antibiotic Use Jobs,Inclusion&Empowerment Were helping build bright,safe and inclusive futures by nurturing skills,accelerating equity and respecting human rights,empowering the people and the communities we serve.47 Diversity,Equity&Inclusion 50 Talent&Benefits 53 Human Rights 56 Safe&Respectful Workplaces Community Connection We understand our business thrives when our communities thrive,so we think globally and act locally,helping feed and support people when and where they need it most.59 Community Impact&Philanthropy 63 Ronald McDonald House CharitiesMcDonalds Corporation Purpose&Impact Report 202220233IntroductionOur PlanetFood Quality&SourcingJobs,Inclusion&EmpowermentCommunity ConnectionSASB Index IMAGE RESTRICTIONSA Message From Our CEO We strive to leverage our entire System to grow our impact across communities,help protect our planet and make a difference in the lives of people around the world.This past year remained challenging in many parts of the world.The humanitarian crisis caused by the war in Ukraine continued,a devastating earthquake struck Turkey,and weve seen markets like France experience profound periods of unrest.At the same time,we continued adapting to a new post-pandemic world.During these moments and more,Im reminded that McDonalds unparalleled size and scale uniquely enables us to show up,and how important it is for us to continue delivering on our purpose of feeding and fostering communities.Offering Families the Choices They Love At McDonalds,were listening to our customers to evolve our offerings,while maintaining the same taste they know and love.Im particularly proud of the work thats gone into the evolution of our Happy Meal Offerings,and how our markets are promoting more balanced choices for families than ever before.Over the last five years,we made significant progress toward five Happy Meal Nutrition Goals that we set in 2018 in 20 of our major markets.Despite the changes and challenges our business encountered over the last few years,our entire System remained committed to these goals.As we look forward,we will share learnings across markets and assess new opportunities to build on our progress.As I reflect on last year,I continue to be impressed by our Systems ability to support and uplift communities.McDonalds Corporation Purpose&Impact Report 202220234IntroductionOur PlanetFood Quality&SourcingJobs,Inclusion&EmpowermentCommunity ConnectionSASB Index Nurturing Our Planet As a leading global brand,weve embraced the opportunity to take action to respond to climate change,and we continue to make progress toward net zero emissions globally by 2050.We are working with our suppliers to scale practices that make agriculture not just more sustainable,but also regenerative.Its not enough to just do less damage to our planet.We need to do more good.Thats why we remain focused on driving climate action,helping to protect natural resources,reducing waste and transitioning to more sustainable packaging.Creating Inclusive Workplaces&Restaurants Guided by our values,were focused on creating inclusive workplaces and restaurants.At the end of 2022,U.S.systemwide spend with diverse-owned suppliers was 25.0%,resulting in McDonalds reaching its diverse-owned supplier spend goal for the second year in a row.We also continued implementation of our Global Brand Standards to promote even safer workplaces across our restaurants.We know that a diverse workforce is critical to McDonalds success,which is why were committed to providing training,education benefits and career paths that empower people and create opportunities in the communities we serve.Serving Our Communities McDonalds has a unique connection with communities around the world,and we believe that comes with a responsibility to support people and their local communities.As a System,weve been able to make a huge impact in support of Ronald McDonalds House Charities(RMHC)mission.Together with our Franchisees and customers,over$182 million was donated to RMHC in 2022,helping provide more than 2.2 million overnight stays for families around the world.Looking Toward the Future Im proud of the McDonalds System for deepening the ways we positively impact our communities.But it doesnt stop here.We strive to leverage our entire size and scale to grow our impact across communities,help protect our planet and make a difference in the lives of people around the world.By working together,as a System and with our suppliers,I believe we have the ability to address these global challenges.Theres more work to be done.But if theres anyone who is up to the challenge,its the McDonalds System and our people who drive our business forward and delight our customers each and every day.Chris Kempczinski,President and CEO,McDonalds Corporation A Message From Jon Banner,Executive Vice President and Global Chief Impact Officer,McDonalds Corporation Since joining McDonalds last year,Ive been incredibly impressed by the passion our people and System have for making the world a better place.McDonalds is one of the most iconic and trusted brands in the world.We believe this puts us in an incredible position to create an unmatched impact on our planet and in our communities,and for our people,Franchisees and suppliers.Thats why were using our voice to help influence positive change around the world,including by working with policymakers,academia,industry groups,nongovernmental organizations(NGOs),community-based organizations,the investment community and others to help us better understand and advance progress on a range of areas.Making a positive impact within our communities and on our world is a priority set from the highest levels of our business,including our Board of Directors.Through the work of various Board committees such as our Sustainability&Corporate Responsibility Committee,we have a long history of commitment to incorporating sustainable and socially responsible practices into our business operations.Im proud of the work we do to help make a difference,and its a privilege to lead our Global Impact team working closely with our Board,CEO and the entire McDonalds System to drive progress forward.I look to the future with optimism because of both the progress weve made,and the dedication and energy we have for the work ahead.McDonalds Corporation Purpose&Impact Report 202220235IntroductionOur PlanetFood Quality&SourcingJobs,Inclusion&EmpowermentCommunity ConnectionSASB Index Who We Are What began as a small drive-in restaurant in San Bernardino,California,has grown into an American icon that proudly serves millions of customers every day around the world.While much has changed over the last six decades,Ray Krocs original commitment to Quality,Service,Cleanliness and Value has endured and made McDonalds a trusted favorite for over 65 years.McDonalds restaurants,whether franchised or operated by us,serve a locally relevant menu of quality food and beverages in communities across more than 100 countries.Of the more than 40,000 McDonalds restaurants at year-end 2022,approximately 95%were franchised.Weve achieved an increase in systemwide sales of nearly$20 billion since 2020,with our global comparable sales growing by almost 11%in 2022.Our success is a direct result of our continued focus on our M,C,D growth pillars:Marketing We continue to elevate our marketing through creative excellence and by driving programs with cultural relevance that can be scaled across markets.Core We are capitalizing on the strength of our core menu and growing market share in chicken and beef.Digital,Delivery and Drive-Thru(3-“Ds”)We continue to demonstrate huge growth potential,remaining focused on meeting customers where they are and providing more personalized experiences.We now have almost 50 million active loyalty users in our top six markets.What matters to our customers matters to McDonalds,so our vision for the future centers on five core values:Service,Inclusion,Integrity,Community and Family.Behind our Golden Arches is a global community of crew,farmers,suppliers,Franchisees and countless others who make up who we are as a brand.People are at the cornerstone of our business and are an essential part of the System.Company employees,who include those in our corporate offices as well as in Company-owned and operated restaurants,totaled over 150,000 worldwide as of year-end 2022,of which approximately 70%were based outside of the U.S.In addition to Company employees,the over 2 million individuals who work in McDonalds franchised restaurants around the world are critical to our success,enabling it to drive long-term value creation and further its purpose and mission.As the consumer landscape shifts,we are using our competitive advantages to further strengthen our brand.Our growth pillars build on our strong foundations to ensure we can meet the moment today and have long-term success.Our mission is to make delicious feel-good moments easy for everyone.The backbone of our brand is,and always has been,a commitment to a set of core values that define who we are and how we run our business and restaurants.Living these values is the foundation of McDonalds next great chapter.Were committed to improving the lives of our people,our industry and the planet by putting our customers and employees first,sourcing quality food,reducing waste impact and expanding job opportunities around the world.As one of the worlds largest restaurant companies,McDonalds believes it has the responsibility to take on some of the most pressing challenges of our time,and we embrace this opportunity to lead by example and create meaningful change.McDonalds Corporation Purpose&Impact Report 202220236IntroductionOur PlanetFood Quality&SourcingJobs,Inclusion&EmpowermentCommunity ConnectionSASB Index The Companys Five Core Values 1 Serve We put our customers and people first.2 Inclusion We open our doors to everyone.3 Integrity We do the right thing.4 Community We are good neighbors.5 Family We get better together.Company-Owned RestaurantsFranchisee-Owned RestaurantsSupporting suppliers in farm management and scaling regenerative practices Prioritizing animal welfare and responsible antibiotic use Conserving water,using it responsibly and efficiently and building resiliency Using more alternative fuels,fewer miles and less fuel Identifying opportunities for increased efficiency Office Buildings/Sites Reducing office greenhouse gas(GHG)emissions Packaging Manufacturing,Research and Development Innovating and sourcing new materials to eliminate unnecessary packaging and encourage circularity Within All Restaurant Buildings/Sites(Company-owned restaurants and Franchisee-owned restaurants)Reducing emissions in our restaurant operations Designing more sustainable restaurants Advancing the recycling of guest packaging Reducing virgin fossil fuel-based and small plastics Company Employees and Franchisee Employees Fostering safe,respectful and inclusive workplaces Offering competitive employee compensation and benefits Providing continuous learning and development opportunities Food Manufacturing,Research and Development Advancing food safety from the farm to our customers Our Operations,Employees and Franchisees Our Suppliers Our Communities The McDonalds System Engaging with suppliers on emissions targets and accounting Protecting nature and promoting biodiverse ecosystems Tackling deforestation in our supply chain Respecting human rights in our supply chain Nutrition and Choice Offering balanced meals for kids and families Marketing responsibly to children Opportunity Employment and Other Philanthropic Investments Reducing barriers to youth employment Making charitable grants and donations Promoting volunteerism opportunities and resourcesFamilies and Well-Being Supporting Ronald McDonald House Charities Providing Support During Times of Need Providing crisis response with community partners Offering hardship and disaster relief for U.S.-owned restaurants Providing food and supply donations McDonalds Corporation Purpose&Impact Report 202220237IntroductionOur PlanetFood Quality&SourcingJobs,Inclusion&EmpowermentCommunity ConnectionSASB Index Company-Owned RestaurantsFranchisee-Owned RestaurantsSupporting suppliers in farm management and scaling regenerative practices Prioritizing animal welfare and responsible antibiotic useConserving water,using it responsibly and efficiently and building resiliencyIdentifying opportunities for increased efficiencyOffice Buildings/SitesReducing office greenhouse gas(GHG)emissionsUsing more alternative fuels,fewer miles and less fuelPackaging Manufacturing,Research andDevelopmentInnovating and sourcing new materials to eliminate unnecessary packaging and encourage circularityWithin All Restaurant Buildings/Sites(Company-owned restaurants and Franchisee-owned restaurants)Reducing emissions in our restaurant operationsDesigning more sustainable restaurantsAdvancing the recycling of guest packagingReducing virgin fossilfuel-based and small plasticsCompany Employees and Franchisee EmployeesFostering safe,respectful and inclusive workplaces Offering competitive employee compensation and benefitsProviding continuous learning and development opportunitiesFood Manufacturing,Research and DevelopmentAdvancing food safety from the farm to our customersOur Operations,Employees and FranchiseesOur SuppliersOur CommunitiesThe McDonalds SystemEngaging with suppliers on emissions targets and accountingProtecting nature and promoting biodiverse ecosystemsTackling deforestation in our supply chain Respecting human rights in our supply chainNutrition and ChoiceOffering balanced meals for kids and familiesMarketing responsibly to childrenOpportunity Employment and Other Philanthropic Investments Reducing barriers to youth employmentMaking charitable grants and donationsPromoting volunteerism opportunities and resourcesFamilies and Well-BeingSupporting Ronald McDonald House CharitiesProviding Support During Times of NeedProviding crisis response with community partnersOffering hardship and disaster relief for U.S.-owned restaurantsProviding food and supply donations Our Impact Strategy&Approach As the leading global foodservice retailer,we believe we have a responsibility to ensure sustainable value creation for shareholders while acting on our most pressing environmental,social and governance challenges.Understanding and effectively managing McDonalds environmental and social impact work through governance structures,strategies and goals is central to operating responsibly,maximizing shared value,ensuring brand trust and building long-term resiliency.Our Impact Areas and Goals In 2020,we announced our Impact Strategy,centered on the four Impact Areas shown below.These were informed by feedback from customers and trusted external organizations to help us make a difference at scale and drive industrywide change across our Company and within communities.We have established strategies,policies,goals and performance indicators to measure and manage annual progress and report against each area.Find out more about our Impact Strategy on our website.Our Impact Strategy Our Planet Were helping to drive climate action,protecting natural resources,reducing waste and transitioning to more sustainable packaging and toys.Food Quality&Sourcing Were working toward responsibly sourcing our priority commodities,prioritizing animal health and welfare and making safe,quality food accessible to families across the world.Jobs,Inclusion&Empowerment Were serving up bright futures in our communities,nurturing skills,accelerating equity and respecting human rights.Community Connection Were helping feed and support people when and where they need it most.How We Prioritize Impact Areas McDonalds prioritizes environmental and social issues where we can have the greatest impact and are most important to our stakeholders.In partnership with other teams,our Global Sustainability&Social Impact team tracks internal and external insights to help prioritize efforts,evolve our strategy and tailor reporting.Through regular engagement,the team discusses the evolution of key issues and transparency expectations with shareholders,suppliers,employees,communities and key NGOs.We use our Enterprise Risk Management(ERM)framework to identify,assess and prioritize strategic,financial and reputational risks with the potential for a sustained impact on our business.The framework leverages internal risk committees,comprising cross-functional leadership,which meet regularly.Issues are escalated to our CEO,Board and/or committees,as appropriate.McDonalds Corporation Purpose&Impact Report 202220238IntroductionOur PlanetFood Quality&SourcingJobs,Inclusion&EmpowermentCommunity ConnectionSASB Index Our Governance Approach Robust governance is critical to managing environmental and social impact issues and delivering long-term value for customers,stakeholders and communities.Our Board and Cross-Functional Leadership team are responsible for guiding our strategies,goals,policies and performance indicators,supported by working groups,Franchisees and suppliers.Board of Directors Oversees our business in an honest,fair,diligent and ethical manner;reviews our strategic direction and objectives;and is responsible for overseeing our ERM framework.Cross-Functional Leadership team Accountable for leading our Impact Strategy,including management of environmental,social and governance(ESG)-related risks and opportunities to help create long-term value.Global Sustainability&Social Impact team Provides Corporate Staff leadership,coordination and support for our global sustainability policies,programs and reporting.ESG Disclosure Committee Oversees procedures related to the governance of our ESG disclosures,including external impact reporting.Engagement with stakeholders Drawing on stakeholders insights and expertise regarding the issues where we can have the greatest impact.Find out more about our governance on our website.Business Resilience Our ERM framework is designed to identify,assess and prioritize strategic,financial and reputational risks with the potential to have a sustained impact on our Company.It is periodically reviewed with learning incorporated to drive transparency and strategic decision-making.Our Board annually reviews strategic and enterprise risks,including our mitigation and overall strategy,competitive landscape,capital structure and management succession planning.Internal auditors support risk identification and monitoring.Read more about how we build the resilience of our business on our website.Engaging With Stakeholders and Policymakers We engage closely with various stakeholders and embrace the role we play with policymakers.The relationships weve developed with experts from academia,industry groups,NGOs and community-based organizations,the investment community and others help us better understand and advance progress on a range of impact areas.Read more about stakeholder engagement and public policy on our website.Supporting the SDGs Much of what we and our Franchisees do provide fulfilling employment with opportunity for continuing education,help reduce waste,more sustainably manage natural resources and address climate change has the potential to contribute to sustainable development.The United Nations Sustainable Development Goals(SDGs)is a global agenda established to end poverty,protect the planet and ensure prosperity for all.McDonalds contributes to many of the agendas 17 goals through our System,our scale and our collaborations.We have identified four SDGs through which we have the largest impact.SDG 4 Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all We offer equitable access to opportunity,ongoing educational support for team members,and offer pre-employment training for young people.SDG 8 Promote sustained,inclusive and sustainable economic growth,full and productive employment and decent work for all Within our respect for human rights,we prevent forced labor in our supply chains,foster workplaces that are safe and respectful and fairly compensate our staff.SDG 12 Ensure sustainable consumption and production patterns We are committed to responsible sourcing of our top commodities to drive progress toward sustainable consumption and production.We are addressing waste streams from our operations,from packaging to food.SDG 13 Take urgent action to combat climate change and its impacts We have committed to reducing our own GHG emissions and we are working with our Franchisees and suppliers to support them in doing the same.Learn more on our Contributing to the UN SDGs web page.McDonalds Corporation Purpose&Impact Report 202220239IntroductionOur PlanetFood Quality&SourcingJobs,Inclusion&EmpowermentCommunity ConnectionSASB Index Our Reporting In This Report Our progress and actions are covered in detail in this report,providing a holistic review of the strides and progress we made in 2022.Unless otherwise stated,the information and data in this report covers McDonalds Corporation and its majority-owned subsidiaries worldwide during fiscal year 2022(January 1 to December 31).The humanitarian crisis caused by the war in Ukraine and the precipitating unpredictable operating environment led us to determine that continuing operations in Russia was no longer tenable nor consistent with McDonalds values.Due to the transfer of our Russian business in May of 2022,Russia has been excluded from our 2022 performance reporting across topics,unless otherwise stated.Go to related topics in this PDF wherever you see this symbol.On Our Website Our approach to each topic is covered in detail on the Our Purpose&Impact pages of our corporate website,including the full scope of our foundational strategies,policies and approaches.Go to more detail online wherever you see this symbol.Key Definitions McDonalds:Our global brand,unless specified otherwise.We/The Company:McDonalds Corporation and its majority-owned subsidiaries worldwide.The System:The Company,its Franchisees and suppliers are collectively referred to as the“System;”also known as McDonalds“three-legged stool.”Franchisees:Collective group of independent individuals and entities owning and operating McDonalds restaurants under one of the following structures conventional franchise,developmental license or affiliate;for more information,please see the Companys Annual Report.McDonalds restaurants/Restaurants:Includes restaurants owned by the Company and its Franchisees.Forward-Looking Statements This report contains certain forward-looking statements or projections,which reflect our expectations regarding future events,performance and goals and involve several risks and uncertainties.Generally speaking,any statement in this report not based upon historical fact is a forward-looking statement.Forward-looking statements can also be identified by the use of forward-looking or conditional words,such as“could,”“should,”“can,”“continue,”“estimate,”“forecast,”“intend,”“look,”“may,”“will,”“expect,”“believe,”“anticipate,”“plan,”“remain,”“confident”and“commit”or similar expressions.In particular,statements regarding our plans,strategies,prospects,goals and expectations regarding our business and industry are forward-looking statements.You should not unduly rely on forward-looking statements.These are not guarantees of performance and speak only as of the date the statements are made.Factors that could cause actual results to differ materially from our expectations are detailed in our filings with the Securities and Exchange Commission.Except as required by law,we do not undertake to update such forward-looking statements.McDonalds Corporation Purpose&Impact Report 2022202310IntroductionOur PlanetFood Quality&SourcingJobs,Inclusion&EmpowermentCommunity ConnectionSASB Index McDonalds Corporation Purpose&Impact Report 20222023 Our business is subject to an increasing focus on environmental and social impact matters In recent years,there has been an increasing focus by stakeholders including employees,franchisees,customers,suppliers,governmental and non-governmental organizations and investors on environmental and social impact matters.A failure,whether real or perceived,to address environmental and social impact matters or to achieve progress on our environmental and social impact initiatives on the anticipated timing or at all,could adversely affect our business,including by heightening other risks,such as those related to consumer behavior,consumer perceptions of our brand,labor availability and costs,supply chain interruptions,commodity costs,and legal and regulatory complexity.Conversely,our taking a position,whether real or perceived,on environmental and social impact,public policy,geopolitical and similar matters could also adversely impact our business.The standards we set for ourselves regarding environmental and social impact matters,and our ability to meet such standards,may also impact our business.For example,we are working to manage risks and costs to our System related to climate change,greenhouse gases,and diminishing energy and water resources,and we have announced initiatives relating to,among other things,climate action,sustainability,and responsible sourcing.In addition,we are engaging in community engagement and philanthropy;as well as diversity,equity and inclusion efforts,such as increasing diverse representation in our corporate workforce and our franchisees,and increasing business diversity spend.We have faced increased scrutiny related to reporting on and achieving these initiatives,as well as continued public focus on similar matters,such as packaging and waste,animal health and welfare,deforestation and land use.We have also experienced increased pressure from stakeholders to provide expanded disclosure and establish additional commitments,targets or goals,and take actions to meet them,which could expose us to additional market,operational,execution and reputational costs and risks.Moreover,addressing environmental and social impact matters requires Systemwide as well as third party coordination and alignment,over which we do not have complete control and which may be unpredictable.The standards by which certain environmental and social impact matters are measured are also evolving and subject to assumptions that could change over time.Please refer to our filings with the Securities and Exchange Commission for more details on risks that could adversely affect our business performance.For our developmental license and affiliate markets(those not operated by the Company),we rely entirely on the accuracy of the performance data provided by their management.For more information on our structure and scope,please see our latest Annual Report on our Investors web pages.In addition,certain information in this report has been provided by third parties,including our suppliers.In these cases,we have relied on these third parties for accuracy and completeness.Statements about future developments and past occurrences are based on information and assumptions available as of the date of publication.Our Franchisees and suppliers are independent business owners who make decisions for their own organizations while maintaining core standards for our brand and customer satisfaction.We cannot prescribe solutions for them.Rather,we work in collaboration to raise awareness and provide tools and opportunities to help them manage ESG issues.We work with suppliers to mutually set objectives and targets,monitor progress and engage collaboratively on shared innovation opportunities and challenges.Through self-managed excellence,suppliers are encouraged to identify and manage key ESG risks and opportunities within their own companies and incorporate relevant goals into their business strategies.Company employees and Company-owned restaurants are in our direct sphere of control.Therefore,many of the measures start with Company restaurants,with a plan to demonstrate success and encourage Franchisees to implement the same sustainability initiatives.The following are trademarks of McDonalds Corporation and its affiliates:McDonalds,Happy Meal,Hamburger University,Archways to Opportunity,Filet-O-Fish,McCaf,McNuggets,McFish,McFlurry,McBites,Big Mac,Ronald McDonald House Charities,RMHC,Ronald McDonald House,Ronald McDonald Family Room and Ronald McDonald Care Mobile.Our PlanetFood Quality&SourcingJobs,Inclusion&EmpowermentCommunity ConnectionSASB Index Introduction11Our 2022 Progress at a GlancePackaging,Toys&Waste Page 22 We sourced 81.0%of primary guest packaging3 from renewable,recycled or certified sources in 2022.4 97.2%of primary fiber-based guest packaging materials globally were from recycled or certified sources in 2022.We made progress to reduce plastics in our Happy Meal toys.As of the end of 2022,we have reduced virgin fossil-fuel based plastic in Happy Meal toys by 47.8%globally since 2018,up from 24.4%as of the end of 2021.In 2022,more than 85.1%,of restaurants in markets with advanced infrastructure5 offered guests the opportunity to recycle packaging items.In these restaurants,guest packaging is collected in customer-facing recycling bins for back-of-house or off-site sorting and recycling utilizing existing local waste infrastructure systems.Climate Action Page 19 In 2021,we committed to adapting our climate targets to help keep global temperature rises below 1.5C.We intend to share more on our climate journey later this year.We continue to progress toward net zero emissions globally by 2050,transforming our business to be more resilient.During 2022,we added two large-scale,U.S.virtual power purchase agreements(VPPAs)to contribute more renewable energy to the grid.As renewable energy projects for which contracts were executed between 2019 and 2023 associated with U.S.electricity use become operational,they are expected to contribute a 33%reduction in emissions from our 2015 baseline.Our Planet Nature,Forests&Water Page 26 We have made progress against our 2030 goal to eliminate deforestation1 from our global supply chain,including for our priority ingredient supply chains where more than 99.0%of commodities by volume supported deforestation-free supply chains in 2022.2 More than 85.1%of restaurants in markets with advanced infrastructure5 offered guests the opportunity to recycle packaging items.Footnotes can be found on page 16 McDonalds Corporation Purpose&Impact Report 2022202312IntroductionOur PlanetFood Quality&SourcingJobs,Inclusion&EmpowermentCommunity ConnectionSASB Index Food Quality&Sourcing Responsible Sourcing Page 38 In 2022,we continued advancing efforts to responsibly source our priority ingredients,achieving:98.5%of beef supported deforestation-free supply chains.6 88.8%of fish sourced for McDonalds Filet-O-Fish came from verified sustainable sources.7,8 100%of palm oil supported the production of sustainable palm oil and deforestation-free supply chains.9 100%of soy sourced for chicken feed supported deforestation-free supply chains.10 99.9%of ground and whole bean coffee sustainably sourced.11 97.2%of fiber-based guest packaging sourced from recycled or certified sources.12 Nutrition&Marketing Practices Page 34 By the end of 2022,we made significant progress across all five Global Happy Meal Goals in our 20 major markets.16 Going forward,we will assess new opportunities and build on the progress we have made so far.Animal Health&Welfare Page 41 As of year-end 2022,more than 91%of the pork purchased in the U.S.comes from suppliers that have phased out the use of gestation stalls for housing confirmed pregnant sows.As of year-end 2022,our egg supply chains are 100ge free in Australia,13 France and Germany,88ge free in the U.S.and 85ge free in Canada.We are on track to achieve our 2024 Broiler Welfare Commitments across in-scope markets.14 Responsible Antibiotic Use Page 41 As of December 2022,we have established market-specific targets for responsible antibiotic use in our global beef supply chain for our 10 in-scope markets,and we will partner in the collection of antibiotic use data and measurement of progress on responsible use associated with global beef and dairy industries.15 The use of Highest Priority Critically Important Antibiotics(HPCIAs)to human medicine has been eliminated from all chicken served in Australia,Brazil,Canada,Europe,Japan,South Korea and the U.S.McDonalds Corporation Purpose&Impact Report 2022202313IntroductionOur PlanetFood Quality&SourcingJobs,Inclusion&EmpowermentCommunity ConnectionSASB Index Jobs,Inclusion&Empowerment Diversity,Equity&Inclusion Page 47 Our 2022 pay gap analysis shows that McDonalds substantially attained equal pay,and in the first quarter of 2023 we closed the small pay gaps identified in the analysis.The results of our 2022 pay gap analysis showed that women globally in Company-owned and operated markets are paid$.9991 for every$1 in base pay on average of what men are paid for similar work.17 It also showed on an aggregate basis,that there was no base pay gap disfavoring Underrepresented Groups in the U.S.18 As of the end of 2022,43%of leadership roles(Senior Director and above)globally are held by women.19,20 As of the end of 2022,28%of leadership roles(Senior Director and above)located in the U.S.are held by individuals in Underrepresented Groups.21,22,23 As of the end of 2022,our U.S.systemwide spend with diverse-owned suppliers was 25.0%,24 resulting in McDonalds reaching its 25%diverse-owned supplier spend goal for the second year in a row.25 We will continue to implement strategies that help support engagement with diverse-owned suppliers and reaching our spend goal.Talent&Benefits Page 50 By the end of 2022,Archways to Opportunity had increased access to education for more than 82,500 people since 2015.Through it,we have awarded more than$185 million in high school and college tuition assistance.In 2022,more than 60,000 individuals successfully completed learning offerings,including Hamburger University restaurant and leadership curricula in-person or virtual formats and eLearning courses.Human Rights Page 53 We became a member of the Leadership Group for Responsible Recruitment,a collaborative effort to drive positive change in how we recruit migrant workers.As reported in our latest Supplier Workplace Accountability(SWA)Global Compliance report,in 2022,we engaged with 5,162 supplier facilities globally including 537 new ones to assess various human rights considerations.Safe&Respectful Workplaces Page 56 We continue to implement our Global Brand Standards across all restaurants in more than 40,000 locations.In 2022,our Building a Safe,Respectful and Inclusive Workplace global eLearning module,available for crew and managers,was made available in multiple languages and offered to Franchisees and Developmental Licensees(DLs)as support.43%of leadership roles(Senior Director and above)globally are held by women.McDonalds Corporation Purpose&Impact Report 2022202314IntroductionOur PlanetFood Quality&SourcingJobs,Inclusion&EmpowermentCommunity ConnectionSASB Index Community Connection16,700 hours volunteered by employees to local community causes.Ronald McDonald House Charities(RMHC)Page 63 Throughout 2022,we donated$20 million to RMHC as part of our five-year,$100 million commitment.In total,McDonalds,our Franchisees and customers donated over$182 million to RMHC in 2022,helping the charity provide more than 2.2 million overnight stays for RMHC families around the world.In 2022,more than 28,000 individuals in the McDonalds System including Owner/Operators,DLs,employees and crew volunteered with RMHC Chapters.Community Impact&Philanthropy Page 59 From July 2018 to the end of 2022,approximately 1.7 million young people have participated in training programs and/or been hired in McDonalds or participating Franchisee restaurants.26 In 2022,we launched a Chicago-based investment strategy supporting local communities,including a$3.5 million investment with 40 local nonprofit organizations.In 2022,we held our first Global Volunteer Month,with over 8,500 employees volunteering across 120 events.Collectively,they volunteered approximately 16,700 hours to local community causes.McDonalds Corporation Purpose&Impact Report 2022202315IntroductionOur PlanetFood Quality&SourcingJobs,Inclusion&EmpowermentCommunity ConnectionSASB Index Notes 1 Deforestation refers to the loss of natural forest as a result of conversion to agriculture or other non-forest land use;conversion to a plantation forest;or severe and sustained degradation as aligned with the definitions of Accountability Framework initiative(Afi).2 Calculated as the aggregated volumes of beef,soy sourced for chicken feed,palm oil,coffee and primary fiber-based guest packaging that are supporting deforestation-free supply chains,as a percentage of the aggregated total volumes sourced of these commodities.3 Packaging.Scope:Inclusive of all markets for our fiber-based guest packaging and Happy Meal book and toy packaging.For our plastic-based packaging,all markets are included except for Israel,Latin America,Turkey and Thailand.Renewable sources refer to material that is composed of biomass from a living source and that can be continually replenished.Renewable applies to plastics only,not fiber.Source:ISO 14021:2016 for plastic,ASTM 6866 or ISO 16620-2.Fiber-based packaging made from 100%recycled sources must be third-party verified,unless certified under a Chain of Custody Forest Management standard.McDonalds requires all wood fiber sourced from Argentina,Cambodia,China,Indonesia,Laos,Malaysia,Russia and Vietnam to be Forest Stewardship Council(FSC)certified or FSC-controlled wood sources with full chain of custody certification.Please refer to our Nature,Forests&Water web page for additional definitions.Exclusions:Primary fiber-based packaging in food packaged off-site of McDonalds restaurants,tray liners and limited locally sourced items.4 In 2022,we saw a decrease in the percentage of our primary guest packaging sourced from renewable,recycled or certified materials as compared to 2021 due to deployment of packaging materials not yet compliant with our goal standards.We know progress in this space is not always linear and we intend to continue making supply chain improvements to meet our packaging sourcing standards and remain committed to our 2025 goal.5 Markets with advanced infrastructure:Mature waste and recycling infrastructure at a national level that has(1)recycling infrastructure network across the entire market,(2)multiple materials being recycled within this national infrastructure network,(3)existing legislation on recycling and(4)high customer awareness of waste and recycling.At the end of 2022,that included 21 markets where McDonalds operates.6 Beef.Scope:Includes all beef raw material used in beef patties sourced for McDonalds products from beef patty manufacturers that supply McDonalds restaurants in the U.S.,Australia,Brazil,Germany,Ireland,France,New Zealand,Canada,the U.K.or Poland.Includes all McDonalds restaurants owned and operated by the Company and its Franchisees in these countries,which collectively represent over 80%of our global beef volumes,as of the end of 2021.The Global Roundtable for Sustainable Beef(GRSB)aims to define the principles of and criteria for beef sustainability globally.The five core principles are focused on the following:managing natural resources responsibly,respecting people and communities,caring for the welfare of animals,ensuring the safety and quality of beef,and driving efficiency and innovation to reduce waste and improve economic viability.These principles allow for national and regional interpretation,given the significant variation in production systems,legal frameworks,sociopolitical factors and climates that exist across the globe.Exclusions:Beef used as secondary ingredients in McDonalds products,for example,as flavoring in a sauce.7 Fish:Fish refers to any type of fish species used as an ingredient in a McDonalds product and listed on the products ingredient statement.Wild-caught fish refers to fish that come from seas,rivers and other natural bodies of water.Filet-O-Fish refers to the McDonalds menu item containing wild-caught fish.Verified sustainable sources refers to wild-caught fish,sourced by suppliers to the McDonalds System,from fisheries that are annually verified as compliant to the McDonalds Sustainable Fisheries Standard by the Sustainable Fisheries Partnerships.Marine Stewardship Council(MSC)Certification is optional to McDonalds markets.Fisheries may also be independently certified as meeting the MSC Principles and Criteria for Sustainable Fishing where a certificate of conformity to an MSC Standard has been granted.Source:www.msc.org.McDonalds may display the MSC certification logo in some of its markets,where fisheries and restaurants are certified against the MSC Chain of Custody traceability standard.Scope:Includes all wild-caught fish sourced for Filet-O-Fish portions served in McDonalds restaurants.Filet-O-Fish represents over 98%of the total fish volumes used in the McDonalds System(by weight).Includes all suppliers of wild-caught fish for Filet-O-Fish to the McDonalds System and all McDonalds restaurants owned and operated by the Company and its Franchisees that sell fish.Exclusions:Products that are not Filet-O-Fish containing wild-caught or farmed fish.We estimate that these products represent less than 2%of the total fish sourced by McDonalds by weight and may include products such as tuna,prawns,shrimp,salmon and calamari;other breaded products;and locally sourced products.The Company has set an expectation that these products are sustainably sourced,although they are not included in this global performance measure given the local,and often promotional,nature of these items.8 In 2022,we saw a decrease in the percentage of our fish sourced from sustainably managed wild-caught fisheries.This was due to impacts on our supply chain from the ongoing humanitarian crisis in Ukraine and McDonalds decision to exit the Russian market in 2022.This resulted in an increase of fish sourced from fisheries whose Fishery Improvements Projects are not yet compliant with our standards.Moving forward,we have plans in place to reduce sourcing from non-compliant fisheries and will increase our supply of fish sourced from compliant fisheries as new facility options have become available.9 Palm oil.Scope:Includes all palm oil(including crude palm oil,palm kernel oil,derivatives and fractions)sourced for McDonalds restaurants for use as restaurant cooking oil,and all palm oil sourced by McDonalds suppliers and used directly as an ingredient in a McDonalds product and listed on the products ingredient statement.Includes all suppliers of products containing palm oil in the McDonalds System and all McDonalds restaurants owned and operated by the Company and its Franchisees that use palm oil.All palm oil volumes are required to be covered by Roundtable on Sustainable Palm Oil(RSPO)certification or credits.All RSPO supply chain models applicable to RSPO are applicable to McDonalds:RSPO Identity Preserved(IP),RSPO Segregated(SG),RSPO Mass Balance(MB)and Book and Claim(BC),although McDonalds is committed to increasing traceability by specifying physical certification for the palm oil used in the McDonalds System in the greatest volumes(IP,SG or MB).Exclusions:Palm oil,palm kernel oil or their derivative used as secondary ingredients in McDonalds products.This is when palm oil is used as an ingredient within an ingredient,for example,as an emulsifier.10 Soy(for chicken feed).Scope:Includes all soybean volume used in the feed of chicken sourced for McDonalds products by all chicken suppliers to the McDonalds System and all McDonalds restaurants owned and operated by the Company and its Franchisees that sell chicken.Europe refers to Austria,Azerbaijan,Belarus,Belgium,Bosnia,Bulgaria,Croatia,the Czech Republic,Denmark,Estonia,Finland,France,Georgia,Germany,Greece,Herzegovina,Hungary,Ireland,Italy,Kazakhstan,Latvia,Lithuania,Luxembourg,Malta,Moldova,the Netherlands,Norway,Poland,Portugal,Romania,Russia,Serbia,Slovakia,Slovenia,Spain,Sweden,Switzerland,the U.K.and Ukraine.Given the complexity of soy supply chains,we consider that,unless demonstrated,all of McDonalds sources of soy for chicken feed fall into high-deforestation priority regions,with the exception of chicken sourced in North America,where soy used in chicken feed is locally produced and considered low risk.Exclusions:Soy used as an ingredient in McDonalds products sold in restaurants,for example,soy oil.11 Coffee.Scope:Includes all ground and whole bean coffee,including decaffeinated coffee,used in espresso-based drinks and coffee brewed at McDonalds restaurants,and all ground and whole bean coffee in McDonalds branded retail products.Includes all suppliers of coffee to the McDonalds System.Market scope includes all McDonalds restaurants owned and operated by the Company and its Franchisees that sell coffee,and retail outlets selling McDonalds branded coffee products.Sustainably sourced refers to coffee sourced by suppliers to the McDonalds System that complies with the requirements set out by one of the following third-party certification schemes as being either:Rainforest Alliance Certified(www.ra.org);UTZ Certified(www.utz.org);Fair Trade USA Certified(www.fairtradecertified.org);Fairtrade International Certified(),or sourced from an approved McCaf Sustainability Improvement Platform(SIP)program.McDonalds requires all coffee sourced from Honduras,Indonesia and Vietnam to be Rainforest Alliance Certified.Exclusions:Coffee extracts and ingredients used in products such as frapps and coffee in baked goods;coffee in cold brew drinks if they are brewed off-site;coffee extract in ready-to-drink retail products;and other locally sourced products containing coffee.12 Fiber.Scope:Primary fiber-based packaging refers to products that are used to package guest food on premises at McDonalds restaurants.This type of packaging includes containers,cups,wraps,bags for food,beverages,napkins,folding cartons,clamshells,wraps,food service bags,napkins,salad bowls,Happy Meal cartons,drink carriers and cup carriers.In 2021,the primary fiber-based packaging scope was expanded to include wood stirrers and cutlery,as well as paper straws and lids.Certified sources refer to suppliers of primary fiber-based packaging to the McDonalds System that comply with the forest management and chain-of-custody certification requirements set out by one of the following third-party schemes:Forest Stewardship Council(FSC);Programme for the Endorsement of Forest Certification(PEFC)or PEFC-endorsed national systems including,for example,Sustainable Forestry Initiative(SFI),CSA Group(Canada)and Cerflor(Brazil).McDonalds requires all wood fiber sourced from Argentina,Cambodia,China,Indonesia,Laos,Malaysia,Russia and Vietnam to be Forest Stewardship Council(FSC)certified or from an FSC-controlled wood source with full chain-of-custody certification.Recycled sources refer to material that has been reprocessed from recovered(reclaimed)material by means of a manufacturing process and made into a final product or into a component for incorporation into a product.Recycled material applies to plastics and fiber.Fiber-based packaging made from 100%recycled sources must be third-party verified,unless certified under a chain-of-custody forest management standard.Source:ISO 14021:2016.Renewable sources refer to material that is composed of biomass from a living source and that can be continually replenished.Renewable applies to plastics only,not fiber.Source:ISO 14021:2016,for plastic,ASTM 6866 or ISO 16620-2.Third-party verification means that an independent accredited organization has reviewed the manufacturing process of a product and has determined that the final product complies with standards for the attributed claim.Credible third parties include professional auditing and certification bodies.Exclusions:Primary fiber-based packaging in food packaged off-site McDonalds Restaurants,tray liners and limited locally sourced items 13 Please see McDonalds Australias website for more information:https:/.au/our-impact/food-quality-sourcing.14 These commitments apply to chicken raised for sale at McDonalds restaurants in Australia,Canada,France,Germany,Italy,Ireland,the Netherlands,Poland,South Korea,Spain,Switzerland,the U.K.and the U.S.15 This goal focuses on Australia,Brazil,Canada,France,Germany,Ireland,New Zealand,Poland,the U.K.and the U.S.,which represented our top 10 beef sourcing countries and accounted for over 80%of our global beef supply chain as of the end of 2022.McDonalds Corporation Purpose&Impact Report 2022202316IntroductionOur PlanetFood Quality&SourcingJobs,Inclusion&EmpowermentCommunity ConnectionSASB Index 16 Our major markets include the U.S.,Canada,Brazil,Argentina,the U.K.,France,Germany,Austria,Spain,Netherlands,Italy,Poland,Sweden,Switzerland,Mexico,Hong Kong,China,Japan,Taiwan and Australia.While initially included in these 20 markets,Russia was removed in 2022 following business changes and our exit from this market.We subsequently incorporated Mexico into the goal scope,as Keybridge was already monitoring their progress and it allowed us to maintain tracking against 20 markets.17 The following countries are included in the 2022 analysis:U.S.A,Canada,France,Germany,the U.K.,Australia,New Zealand,the Czech Republic,Slovakia,Poland,Austria,Belgium,Switzerland,the Netherlands,Spain,Italy and Portugal.In addition to these countries,descriptive analysis without statistical modeling has been conducted over the employees in the following countries:Singapore,Hong Kong,UAE(Dubai)and Ireland.These countries have been excluded from the statistical modeling due to insufficient headcount.18 Underrepresented Groups Pay Gap Analysis Results(U.S.):The analysis is conducted on U.S.employees who voluntarily disclosed race/ethnicity information.19 The December 2020 baseline data shows women make up 37%of leadership(Senior Director and above)roles.20 2022 Data includes aggregate numbers from Australia,Austria,Belgium,Canada,Czech Republic,France,Germany,Italy,the Netherlands,Poland,Portugal,Slovakia,Spain,Switzerland,Ukraine,the U.K.and the U.S.Corporate employees who support our Development Licensees(DLs)are also included.Data was obtained through various means,including informal identification and voluntary self-disclosure.21 In the U.S.,the term“Underrepresented Groups”generally means people who identify as Black,Indigenous,Asian or Pacific Islander,or otherwise as people of color,people of Hispanic or Latino/a/x descent,people with disabilities,people who identify as LGBTQ ,people from religious minorities or people having a combination of these identities or attributes.For purposes of McDonalds reporting,including with respect to Human Capital Metrics and Equal Pay,“Underrepresented Groups”is defined as people who identify as Black,Indigenous,Asian or Pacific Islander,people of Hispanic or Latino/a/x descent,or people having a combination of these identities or attributes.22 The December 2020 baseline data shows Underrepresented Groups make up 29%of leadership(Senior Director and above)roles.23 Data includes U.S.paid employees only.All U.S.paid employees working in other markets are excluded.This data reflects U.S.employees who voluntarily disclosed race/ethnicity information.Due to rounding,some totals may not correspond with the sum of the separate figures.24 This figure includes supplier spending by all restaurants,whether operated by McDonalds or by Franchisees.Further,this figure is inclusive of U.S.Company-owned restaurant spend,supply chain,restaurant development,marketing,legal,global technology,workplace solutions,communication,finance,global people and other corporate functions.This figure also includes purchases made by Franchisees for advertising,restaurant development,technology,food,distribution,packaging,equipment and uniforms.This scope excludes noncontrollables(taxes,utilities,rent,aircraft fuel,airport fees,facility leases,donations,bank fees and subscriptions).Our diverse-owned diversity spend figures in the U.S.includes both self-certified and formal industry-recognized certification and Tier 1 and Tier 2 spend.Tier 1 suppliers are those from whom McDonalds buys directly.Tier 2 suppliers are those with whom our suppliers do business.FY2020 percent spend through the U.S.System with diverse-owned suppliers was restated following update of diversity classification of two suppliers and evolved data practices around Tier 2 spend reporting and accounting for Supply Chain managed spend for equipment and operating supplies.25 Our goal continues to be to attain 25%U.S.systemwide spend with diverse-owned suppliers by the end of 2025.Variance of systemwide spend with diverse-owned suppliers may occur in 2023 or 2024.26 This figure is based on actual and,in some cases,extrapolated hiring data for the following participating markets:Argentina,Australia,Brazil,Canada,China,Colombia,Hong Kong,Italy,Japan,Korea,Mexico,Portugal,Spain,Switzerland,the U.K.and the U.S.McDonalds collects data from McOpCo and participating Franchisees but extrapolates where it does not have access to the underlying data globally.Additional markets that provide training data include and Argentina,Austria,Brazil,Colombia,Denmark,France,Germany,Italy,Jordan,Mexico,the Netherlands,Switzerland,the U.K.and the U.S.McDonalds Corporation Purpose&Impact Report 2022202317IntroductionOur PlanetFood Quality&SourcingJobs,Inclusion&EmpowermentCommunity ConnectionSASB Index We recognize that our success is inherently connected to the health of our shared natural resources,which are the essence of our agricultural supply chains.Therefore,we know we need to protect our planet and manage our impacts,so that we can continue to feed the communities we serve for generations to come.Our Planet That is why were acting now to deliver on our climate ambitions,protect our global natural resources,increase renewable energy usage,reduce waste and transition to more sustainable packaging and toy materials.We have created a strategy that puts the planet first by joining the United Nations Race to Zero campaign,committing to achieve net zero emissions by 2050 and do our part to help keep global temperature increases below 1.5C.IN THIS SECTION 19 Climate Action 22 Packaging,Toys&Waste 26 Nature,Forests&Water McDonalds Corporation Purpose&Impact Report 2022202318IntroductionOur PlanetFood Quality&SourcingJobs,Inclusion&EmpowermentCommunity ConnectionSASB Index Climate Action We are taking action on climate and transforming our food systems to be more resilient for the future ahead.Reducing emissions and adapting to climate change is critical to the success of the McDonalds System.We work toward our climate action ambitions by focusing on reducing emissions in our restaurant operations,engaging suppliers to reduce emissions in supply chains,strengthening our business resilience and using our voice to advocate for collective transformation.In 2021,we committed to adapting our climate targets to help keep global temperature rises below 1.5C.We intend to share an update on our climate journey later this year.Scope 1 Sources of direct emissions (owned or controlled by the Company)from Company-operated restaurants and offices only 2021 GHG Emissions(Metric Tons)2021:113,286 2015(Baseline):162,958 0.18%of total emissions Scope 2*Sources of indirect emissions(owned or controlled by the Company)from Company-operated restaurants and offices only 2021 GHG Emissions(Metric Tons)2021:469,236 2015(Baseline):1,295,064 0.8%of total emissions*Market-based Scope 3 Sources of all other indirect emissions from Franchisee-owned restaurants,waste from all restaurants,supply chain,transportation and logistics 2021 GHG Emissions(Metric Tons)2021:56,803,958 2015(Baseline):49,802,177 99.02%of total emissionsOur 2021 Footprint McDonalds Corporation Purpose&Impact Report 2022202319IntroductionFood Quality&SourcingJobs,Inclusion&EmpowermentCommunity ConnectionSASB Index Our PlanetOur Strategy in Brief Climate change is one of the biggest challenges of our time.Natural disasters and extreme weather patterns pose significant risks to food supply resilience and to communities around the world,including those from which we operate and source.While acting on climate change is challenging and requires significant investment,it is critical to the strength of our business now and in the future.We have a unique opportunity as a global brand to mobilize the entire McDonalds System the Company,Franchisees,suppliers and producers to catalyze change.With these partners,we are helping to improve our restaurants and food systems and create a better future.We have embedded our climate goals across our operations,and are prioritizing action in our most carbon-intensive areas,including restaurant energy,our supply chain,and packaging and waste.Our Climate Targets and Net Zero Pledge In 2018,we committed to reducing GHG emissions related to our restaurants and offices by 36%by the end of 2030 from a 2015 base year.Were also targeting a 31%reduction in emissions intensity(per metric ton of food and packaging)across our supply chain.These science-based targets were approved by the Science Based Targets initiative(SBTi)in 2018,and we have continued to work toward them by collaborating with industries,governments,Franchisees,suppliers,consumers and local communities.In 2021,we joined the United Nations Race to Zero campaign,committing to net zero emissions by 2050.Through the SBTi Business Ambition for 1.5C campaign,we are also in the process of adapting our interim 2030 climate targets to help keep global temperature rises below 1.5C.2021 Climate Risk&Resiliency Summary (PDF 3.82 MB)Our Comprehensive Disclosure on Climate Action McDonalds 2022 CDP Climate Change(PDF 828 KB)Collaborations to Advance Our Strategy We are frequently engaging with industry groups focused on developing tools and best practices for addressing climate change.In 2022,we were part of the SBTi Forest,Land and Agriculture(FLAG)project consultative group,which provided expert advice and direction for companies in land-intensive sectors,including developing guidance to ensure robust,clear and practical target-setting.As part of the C-Sequ Working Group,we helped develop a clear methodology to account for carbon sequestration in life cycle analysis(LCA)calculations.We also supported the work of the GWP*Group,helping to assess and model its methodology to better understand the warming impact of methane.We continue to implement our strategy through:Measuring our energy impact using millions of climate tracking data points,sharing actionable data and benchmarking insights to inform development of our strategy.Collaborating to drive and advocate change by partnering with suppliers,Franchisees,industry,governments,NGOs and others on climate action initiatives.Implementing climate solutions in our supply chain through work with suppliers that strengthens regenerative agriculture practices to conserve our forests and reduce emissions.Accelerating circularity with packaging and waste strategy,which aims to reduce waste while reducing emissions across our operations and supply chain.Increasing energy efficiency in restaurants by designing and operating more sustainable restaurants,embracing practices that conserve energy,as well as increasing renewable energy use,with requirements set out in our Global Restaurant Standards(GRS).Read more about our Climate Action strategy and our approach to responsible sourcing on our website.McDonalds Corporation Purpose&Impact Report 2022202320IntroductionOur PlanetFood Quality&Sourcingood Quality&SourcingFJobs,Inclusion&EmpowermentJobs,Inclusion&EmpowermentCommunity ConnectionSASB Index Sustainable Building Innovation In 2022,McDonalds China opened its first restaurant to receive LEED(Leadership in Energy and Environmental Design)Zero Carbon certification and Zero certification for net zero energy a Drive-Thru restaurant in Shougang Park.The site features more than 2,000 m2 of on-site solar panels that are expected to generate approximately 330,000 kWh annually enough to cover the sites daily operational power needs.The restaurant is expected to become the first in the industry to meet dual LEED Zero Carbon Emission and Zero Energy Consumption standards in China and the wider Asia Pacific region.McDonalds China has also developed an action plan to promote more sustainable restaurants.Through the plan,a total of 1,800 restaurants meeting LEED certification standards for Interior Design and Construction were opened by the end of 2022.McDonalds UK&Ireland seeks to achieve net zero emissions for all market restaurants and offices by 2040.To achieve this,the market leveraged its first LEED Net Zero standards restaurant,in Market Drayton,as a blueprint for future new-build restaurants.The restaurant,launched as a testing ground for sustainable developments,was the first restaurant built to the UK Green Building Council(UKGBC)Net Zero Standard for operational energy and embodied carbon construction.The market has now opened a second net zero restaurant in Louth,Lincolnshire.In Chicago,our flagship restaurant has similarly served as a testing hub for sustainable solutions that could be applied to other locations,such as LED lighting fixtures and more efficient kitchen equipment solutions.After two years in operation,our Chicago flagship restaurant was the first McDonalds to receive LEED Platinum certification.Advancing Regenerative Agriculture As well as designing our sites to be more sustainable,were working with our suppliers and farmers across the world to scale regenerative farming practices that can improve productivity,build resiliency to a changing climate and conserve the forests and natural ecosystems we all depend on.Read more about our approach to regenerative agriculture on page 39 and on our Responsible Sourcing web page.Next Steps We continue to progress toward net zero emissions globally by 2050,transforming our business to be more resilient.During 2022,we added two large-scale U.S.VPPAs to contribute more renewable energy to the grid.As the U.S.-based projects for which contracts were executed between 20192023 continue coming online over the next few years,the energy generated is expected to be equivalent to more than 11,700 restaurants worth of electricity and is expected to contribute to a 33%reduction in GHG emissions from our global 2015 baseline.While this represents the impact of our contracted projects,the landscape of the renewable energy industry continues to experience supply chain issues and other headwinds and we also recognize that the impact from some contracted projects in the portfolio could be replaced with other future projects.We continue to monitor the progress of all projects to ensure they meet our selection criteria as we make progress toward our climate targets.Additionally,we continue to collaborate with suppliers,encouraging more of them to set climate targets and implement strategies for reducing emissions intensity,tailored to their own supply chains.Introduction McDonalds Corporation Purpose&Impact Report 20222023 Our Planet Food Quality&Sourcing Jobs,Inclusion&Empowerment Community Connection SASB Index 21Packaging,Toys&Waste We are accelerating solutions that help reduce waste while also transitioning to more sustainable packaging and toy materials.It is our vision that packaging and materials do not end up as waste in the environment.Our packaging,toys and waste strategies help keep communities clean,protect the planet for future generations and support our long-term business resilience.97.2%of fiber-based primary guest packaging globally is already from recycled or certified sources.Our Recent Packaging Innovations For years,a key pillar of our strategy has been to reduce the materials we use by lightweighting and optimizing our packaging.We are accelerating our progress to reduce materials across our portfolio,redesigning some of our most iconic products to eliminate unnecessary packaging and increase opportunities for recovery.Paper straws and wooden cutlery have been deployed in 50 markets.Pressed paper cutlery alternatives to plastic being launched across the U.K.and Ireland with more to come as supply chains develop.Transition to molded fiber technology is progressing across the European region with priority given to legislated markets for cold lids,hot lids and sundae cup and lid packaging.Reusable packaging has been tested across multiple markets.Wooden stirrers are now deployed in many markets across the globe with the remaining markets to complete transition in 2023.Introduction McDonalds Corporation Purpose&Impact Report 20222023 22Food Quality&Sourcing Jobs,Inclusion&Empowerment Community Connection SASB Index Our Planet Our Strategy in Brief Were committed to advancing a circular economy keeping materials in use rather than relying on new ones.To help us achieve this,were investing in strategic partnerships to help address systemic challenges such as recycling infrastructure,demand for recycled content and development of new materials.The Five Focus Areas of Our Strategy 1 Eliminating unnecessary packaging and streamlining materials for easier recovery in addition to innovating new materials,testing reusable solutions and creating opportunities for behavior change to reduce usage.2 Transitioning away from virgin fossil fuel-based plastics in our primary guest packaging to 100%renewable,recycled or certified sources27 by the end of 2025 and to drastically reduce plastics and transition to more sustainable materials in our Happy Meal toys around the globe.3 Increasing the use of recycled materials throughout our System to drive global demand for recycled content including in packaging,toys and design materials for restaurants and facilities.4 Advancing a circular economy through the implementation of many tools to improve recycling and repurposing of materials,making it easier for customers to recycle where infrastructure exists and reduce the waste coming out of our restaurants.5 Partnering to increase the scale and impact of a circular economy approach to packaging and waste.By engaging in strategic partnerships with brands and NGOs,we can increase adoption of circularity across our industry.Our Performance Many Markets,One McDonalds System As a global company operating in over 100 markets,there is no“one size fits all”when it comes to packaging and recycling solutions.Local waste infrastructure and customer preferences make each market unique.Thats why local pilots are so important to identify sustainable packaging solutions.We track progress against our goals through supplier and restaurant reports on packaging composition,usage and waste.As we continue to enhance our methodology and data quality,we can expect annual progress figures to adjust in future reporting cycles.Goal:We aim to source 100%of our primary guest packaging27 from renewable,recycled or certified materials by the end of 2025.Progress:By the end of 2022,we were approximately 81.0%of the way toward our goal of sourcing 100%of our primary guest packaging from renewable,recycled or certified materials.28 Approximately 97.2%of our primary fiber-based guest packaging was sourced from recycled or certified sources in 2022.Non-structural components of packaging29 are out of scope.We are making significant progress eliminating unnecessary packaging and transitioning to more sustainable materials.This is dependent upon reinventing our packaging in a way that continues to meet the needs of our customers and our business and working with suppliers to build supply chains.We are reducing plastic use by redesigning items such as switching to paper-based straws,deploying new McFlurry cups without plastic lids and introducing salad boxes and cutlery made from renewable fiber.As we strive to meet our global goal,we are working with our suppliers to test new technologies that can scale globally.For example,we advanced innovative molded fiber technologies to replace plastic lids and sundae ice cream cups.We are deploying these renewable molded fiber solutions across Europe and in other markets around the world.Specifically,as it relates to developing alternatives for packaging liners,we are making investments in the technology and supply chain capabilities and collaborating with our suppliers to do so however,the timeframe set for progress is dependent upon our ability to test and deploy at global scale,which continues to be a challenge.We remain committed to finding a solution now and in the future,toward our goals and for the industry,while monitoring local regulatory requirements.We continue to focus on reducing virgin fossil-based plastics for small items such as straws,cutlery and stirrers.In addition to fiber-based alternatives that are available in the EU markets,we are now using paper straws in Canada,Australia,New Zealand and South Korea.Further markets,including Hong Kong,the Philippines,Singapore and Japan,are transitioning to paper straws in 2023.Fiber-based cutlery is being used in EU member states,the U.K.,Australia,New Zealand,Hong Kong and Canada.The remaining global markets are expected to transition to fiber-based cutlery by end of 2025.Wooden stirrers are now deployed in all markets globally,with the exception of the Middle East,South Africa and Vietnam,where this transition is planned for 2023.Introduction McDonalds Corporation Purpose&Impact Report 20222023 23Food Quality&Sourcing Jobs,Inclusion&Empowerment Community Connection SASB Index Our Planet In addition,McDonalds launched 30 oz clear cups that contribute to sourcing of recycled and bio-based mass balance materials across the U.S.market in 2022 following a successful pilot,and plans to continue rolling out additional sizes and lids throughout 2023 and 2024.Further improvements were made on plastic cutlery alternatives,with pressed paper options being launched in the U.K.and Ireland.This compostable alternative is made from responsibly managed materials and can be disposed of in paper recycling bins.This has contributed to a reduction of 250 metric tons of plastic annually.In Hong Kong,McDonalds restaurants and McCaf stores are phasing out plastic cutlery and accompanying bags in favor of wooden forks,spoons and knives.The ultimate impact of this initiative will be to reduce consumption of approximately 90 million pieces of plastic per year.We are deploying wooden alternatives to plastic cutlery in several other markets,including in Australia,Europe,China and India.This has led to a reduction of over 4,000 metric tons of plastic annually.Percentage of Primary Guest Packaging Sourced from Renewable,Recycled or Certified Sources by Material 2022 Percentage of primary guest packaging from renewable,recycled or certified sources.81.0%Percentage of fiber-based primary guest packaging sourced from recycled or certified sources.97.2%Were also reducing the amount of packaging materials our products use.For example,by switching to fiber wraps instead of paperboard cartons,McDonalds Netherlands has saved 500 metric tons of packaging.Germany,France and the Netherlands transitioned from clamshells to paper wraps and bags for select menu items,eliminating approximately 7,000 metric tons of packaging annually.Preparation for a shift to reusable tableware is under way across many markets.We continue to evaluate and consider the role reusables can play in our restaurants around the world,alongside other circularity solutions.Goal:Drastically reduce plastics in Happy Meal toys around the globe and transition to more sustainable materials by the end of 2025.30 Progress:By the end of 2022,we reduced virgin fossil fuel-based plastic in Happy Meal toys by 47.8%,an improvement from the 24.4hieved in 2021.We continue to work on sourcing materials used in Happy Meal toys from renewable,recycled or certified sources.Achieving this goal is expected to result in an approximately 90%reduction in virgin fossil fuel-based plastic used to make Happy Meal toys.We have also been increasing the use of more sustainable plastics,decreasing our dependence on virgin resources.Throughout 2022,we saw many markets run paper-only programs,including an Arts and Crafts execution with Teen Titans Go!Additionally,several executions used renewable plastics,including a Hot Wheels Monster Truck blending Green PE(bio-based polyethylene produced from renewable raw material sugar cane)chassis and wheels,with a paper body and packaging.Goal:We aim to implement global and local solutions across our business to advance the reduction,reuse or recycling of guest packaging,and help create demand for recycled materials by the end of 2025.Progress:In 2022,more than 85.1%,of restaurants in markets with advanced infrastructure31 offered guests the opportunity to recycle packaging items.In these restaurants,guest packaging is collected in customer-facing recycling bins for back-of-house or off-site sorting and recycling utilizing existing local waste infrastructure systems.Across the globe,waste and recycling infrastructure differs heavily.Some of our markets are operating within advanced infrastructures and others where infrastructure is still developing.In markets where recycling infrastructure is a challenge,were focusing on addressing systemic constraints through partnerships and informing local recycling policy.In many markets globally,we are managing packaging waste through recycling our fiber-based packaging.Over 7,000 restaurants in Europe offer customers the opportunity to recycle guest packaging,and the recycling of used cooking oil,cardboard and food waste from our kitchens is standard operating procedure.Introduction McDonalds Corporation Purpose&Impact Report 20222023 24Food Quality&Sourcing Jobs,Inclusion&Empowerment Community Connection SASB Index Our Planet Goal:Ensure all primary guest packaging is free from added fluorinated compounds by the end of 2025.32 Progress:By the end of 2022,96%of our guest packaging items did not contain added fluorinated compounds.For the remaining items,we continue to find and apply alternative coating materials that offer the right grease-resistant barriers.In the U.S.,we have removed all intentionally added fluorinated compounds from our guest packaging.McDonalds packaging materials comply with state,federal and national-level laws and regulations,including the U.S.Food and Drug Administration(FDA)and EU,and are verified through chemical testing.Meeting Customer Expectations of Convenience,Safety and Sustainability Hygiene and safety are at the forefront of customers minds,and we strive to ensure they are balanced with long-term sustainability.Visit our Food Safety web page to learn more about our commitment to food safety and sustainability.Partnering to Increase Scale of Solutions Addressing circularity is not a challenge we can tackle alone.To help drive change at scale,we are engaging with the wider business community,NGO partners,political stakeholders and academics,as well as our Franchisees,suppliers,customers and restaurant crew.In 2022,Closed Loop Partners NextGen Consortium,of which we are a founding partner,continued to play a leading role in increasing recycling access in the U.S.for paper and plastic single-use foodservice packaging,through collaborations with partners from across various industry bodies,NGOs and communities.We are also a Principal Member of ReSource:Plastic,World Wildlife Funds(WWF)platform for translating large-scale corporate commitments into measurable progress on plastic waste reduction.Exploring the role of Reusable Packaging In recent years,we have been exploring the potential role and impact of implementing reusable packaging in McDonalds restaurants.While reusables may have the potential to be one solution among others to drive circularity,additional solutions,such as recycling,recovery and reduction,must continue to be part of an overall waste reduction strategy.We know that advancing a more circular economy is not a one-size-fits-all approach,and we remain committed to doing our part to advance the most practical solutions for our industry.In a number of markets we have tested and implemented reusable packaging systems most recently in France,Germany and Luxembourg to meet legislative requirements.We are still learning about the benefits and potential unintended environmental consequences of reuse systems in our industry.For example,a switch to reusable packaging means transitioning from primarily certified and renewable fiber to a rigid plastic to ensure the item can be washed repeatedly and be durable for the volume of customers we serve.Reusables could result in more plastic waste if reusable items are not returned or reused a high volume of times.Reusables require washing,which means we need to continue measuring the water and energy used for washing and the impact on GHG emissions.We believe more time is required to test and understand the environmental,economic and food safety impacts of reusable food packaging before scaling.While we continue to explore the impact of reusables on our business and the environment,we remain focused on our existing goals to advance the reduction and recycling of guest packaging and improve the sustainability of the packaging materials we source.Tackling Food Waste McDonalds has developed a system to minimize supply chain food waste using a hierarchy adapted from the U.S.Environmental Protection Agencys(EPA)Food Recovery Hierarchy.Our approach is supported by our Global Food Disposition Policy to help eradicate food waste in restaurants and supply chain facilities.In 2022,McDonalds USA and its suppliers in the U.S.donated over 1.6 million pounds of food and paper combined from suppliers and distribution centers worth more than$3.4 million to support local U.S.food banks and communities.Introduction McDonalds Corporation Purpose&Impact Report 20222023 25Food Quality&Sourcing Jobs,Inclusion&Empowerment Community Connection SASB Index Our Planet Nature,Forests&Water Were taking a holistic approach to protecting natural resources,the communities that rely on them and the future of our business.We aim to help manage nature-related risks and build resilience by working with farmers to preserve and regenerate nature,and support biodiversity.Water is also a critical resource at every step of our value chain,from supplier processes to our restaurant and office operations.These issues are closely connected to our work in climate action,responsible sourcing and human rights.The Primary Commodities We Source Natural resources like healthy soils,grasslands and forests are particularly important to the farming systems and communities that produce food for our menu.We prioritize specific requirements in certain regions and countries based on our definitions of low and high priority regions as related to deforestation risk,taking into account supply chain data and trends.See our Definitions of Deforestation section for more details on how these are defined.Beef McDonalds requires that all the beef we source meets the requirements of our Deforestation-Free Beef Procurement Policy and Commitment on Forests.33 Palm Oil Palm oil sourced for McDonalds restaurants or as an ingredient in McDonalds products must meet the requirements of Roundtable on Sustainable Palm Oil(RSPO)certification.35 Soy(for Chicken Feed)We require all soy for chicken feed to be sourced from low priority regions or,if from high priority regions,to support responsible soy production.34 Fiber Used in Primary Guest Packaging McDonalds requires that our primary fiber supply is sourced from Forest Stewardship Council(FSC)certified or FSC-controlled wood sources,with full chain of custody certification in countries identified as high priority regions for fiber.37 Coffee McDonalds requires coffee sourced from Honduras,Indonesia and Vietnam to be Rainforest Alliance Certified36 because they have been identified as high-deforestation regions.PLACEHOLDER PLACEHOLDER PLACEHOLDER Introduction McDonalds Corporation Purpose&Impact Report 20222023 26Food Quality&Sourcing Jobs,Inclusion&Empowerment Community Connection SASB Index Our Planet Our Strategy in Brief McDonalds has been on a journey to help support sustainable food production and forest conservation for more than three decades.Were also taking action to help prevent forest clearances,protect biodiversity,reduce our carbon footprint and respect human rights.To adapt our value chain to and mitigate against climate change,we prepare for climatic events that could impact the natural resources we depend on,as well as transition risks associated with the shift to a low-carbon economy.Our targets for climate action take into account estimated emissions from land use change such as deforestation for farmland which are modeled using our climate impact tracking system.We embed water stewardship practices in our sourcing requirements and restaurant operational practices,and support projects across the world that safeguard nature.Nature-based solutions are actions to protect,sustainably manage and restore natural or modified ecosystems that address societal challenges effectively and adaptively,simultaneously providing human well-being and biodiversity benefits.Using nature-based solutions helps us to continue reducing our environmental impact related to climate and controlling the level of deforestation in our primary commodity chains.We are bringing together innovative forest and climate measurement systems to better assess the positive impact of forest conservation in our supply chains and advance more planet-friendly processes.We also encourage others to do their part and to drive industry action at scale through our memberships in collaborative groups like the Consumer Goods Forum(CGF),the Forest Positive Coalition,the WWF Climate Business Network and the GHG Protocol Land Based Accounting group,as well as our work in international bodies such as the Global Roundtable for Sustainable Beef(GRSB),and local bodies.These practices contribute to more resilient food systems and communities,and a more sustainable global economy.See our website for a more detailed focus on our forests,nature and biodiversity and water strategies.Definitions of Deforestation Eliminate Deforestation refers to McDonalds global pledge to tackle deforestation,and all of the social and environmental criteria in our Commitment on Forests in our agricultural and forestry supply chains.We use the term“supporting deforestation-free supply chains”below to more accurately reflect the actions we are currently taking to implement,measure and report progress toward our Commitment on Forests.Deforestation refers to the loss of natural forest as a result of conversion to agriculture or other non-forest land use;conversion to a plantation forest;or severe and sustained degradation as aligned with the definitions of Accountability Framework initiative(Afi).High priority regions are defined as countries,biomes,municipalities,postcodes or farms/plantations that are identified as areas where deforestation occurs or is projected to occur as determined through regular assessments that rely on the latest supply chain data and trends.McDonalds assesses this risk annually with third parties,including WWF,to take into account the latest supply chain data and trends.Low priority regions refers to countries,biomes,municipalities,postcodes or farms/plantations that are classified as no or low risk of deforestation,as determined through regular assessments that rely on the latest supply chain data and trends.McDonalds assesses this risk annually with third parties,including WWF,to take into account the latest supply chain data and trends.Supporting deforestation-free supply chains refers to commodities in our supply chains that are either sourced sustainably from high priority regions and comply with the certification or verification schemes as set out below,or are sourced from low priority regions as above.Our Performance Goal:Eliminate deforestation from our global supply chains by the end of 2030,building on the progress from our 2020 milestones in highest priority commodities and regions.When we set this commitment in 2015,we prioritized action and measurement with public milestones for 2020 for the products we use in the greatest volumes and with the potential to have the greatest impact on forests.We continue our focus on supporting deforestation-free supply chains for our primary commodities,such as beef,soy(for chicken feed),palm oil,coffee and fiber(used in primary guest packaging).Progress:In aggregate,over 99.0%of these primary commodities continued to be sourced supporting deforestation-free supply chains in 2022.38 Introduction McDonalds Corporation Purpose&Impact Report 20222023 27Food Quality&Sourcing Jobs,Inclusion&Empowerment Community Connection SASB Index Our Planet Supporting Deforestation-Free Supply Chains for Primary Commodities To achieve our goal of eliminating deforestation from our global supply chain by the end of 2030,we are partnering globally with WWF,Proforest and industry groups to multiply positive impact.We are also engaging with suppliers on bespoke plans and enhanced data reporting to mitigate future risks.Percentage of Commodities Sourced in 2022 Supporting Deforestation-Free Supply Chains Beef sourced for McDonalds products33 98.5%Soy sourced for chicken feed for McDonalds products34 100%Palm oil sourced for McDonalds restaurants and used as an ingredient in McDonalds products35 100%Coffee sourced for McDonalds restaurants36 99.9%Fiber for primary guest packaging at McDonalds restaurants37 98.7%We reviewed our soy footprint by volume with Proforest and worked with 3Keel to understand our area-based footprint for priority commodities.Our volumes of physical RSPO certified palm oils increased from 13%in 2016 to 74.5%in 2022(25.6%Segregated,48.9%Mass Balance),with the remaining 25.5%as RSPO Book and Claim Credits.In 2022,we joined the CGFs Forest Positive Coalition.The coalition is a multi-company initiative to stop commodity-driven deforestation and address global climate change issues across consumer goods manufacturers and retailers.As part of this membership,McDonalds will be publicly reporting on an agreed set of key performance indicators(KPIs)to maintain ongoing transparency and accountability.Read more detail in our Consumer Goods Forums Forest Positive Coalition 2022 Report(PDF 197KB).Our Progress to Protecting Nature,Forests&Water McDonalds is committed to working together with stakeholders and supply chain actors to directly support development and improvement of sustainable palm oil production.As such,we are committed to the delivery of NDPE(no deforestation,no expansion on peat and no exploitation)in palm oil production.We recently engaged with one of our major palm oil suppliers,Wilmar,on a series of projects to improve transparency and sustainability outcomes for our palm oil supply chain,alongside our joint partners in Proforest.Through this collaboration,we have been engaged in the development of the NDPE Implementation Reporting Framework(IRF),building on progress made to date to provide an overview of progress for all palm oil mills supporting a refinery.Our work will drive greater improvement in NDPE IRF Deforestation and Peat profiles as well as Land and Labor profiles within our supply chains,including greater engagement with smallholders to help improve traceability and sustainability outcomes.McDonalds has also collaborated with a palm oil sustainable landscape initiative in Indonesia named Sustain Kutim.This initiative takes a holistic approach to reaching NDPE commitments,supporting both district government and local communities to monitor and manage community forests,improve agricultural practices and support livelihoods.In 2021,we conducted water efficiency pilots across 19 restaurants in Southern California.Post-implementation analysis of some restaurants resulted in roughly a 30%reduction in water use and annualized savings of 3.7 million gallons through various retrofits and maintenance measures.Building on this success,an additional 34 stores were surveyed in 2022.McDonalds France encourages good environmental practices through EcoProgress,a sustainability management platform.EcoProgress includes 15 practices focusing on water management,such as improving flush efficiency and waterless urinals.Restaurants are also encouraged to report and analyze their monthly water consumption,then create action plans to improve their consumption using a dashboard provided.To date,we have invested in several initiatives that boost sustainable,regenerative agriculture,including the following in 2022:We are partnering with Tyson Foods on the row crop portion of Tyson Foods Climate Smart Commodities Grant Project and plan to commit$10 million in funding over five years.At scale,this program aims to cover 2 million acres of crop land,some of which will be used to feed Tyson Foods chickens in the U.S.,including those entering the McDonalds U.S.supply chain through 2030.If successful,the Climate Smart Commodities Grant Project also aims to reduce 170,000 metric tons of CO2e annually by year five of the program.In early 2022,we launched a regenerative agriculture program that aims to involve 60 wheat farmers in France,with the goal of planting 230,000 trees within 150 km of hedges by the end of 2030.Working with partner specialists,including the Earthworm Foundation and French organizations Agroof and Icosysteme,the pilot project will work with two cooperatives and McDonalds Frances buns supplier,and will last at least three years.For more on our approach and progress toward regenerative agriculture see page 39 and our Responsible Sourcing web page.Introduction McDonalds Corporation Purpose&Impact Report 20222023 28Food Quality&Sourcing Jobs,Inclusion&Empowerment Community Connection SASB Index Our Planet Notes 27 Packaging:Scope:Inclusive of all markets for our fiber-based guest packaging and Happy Meal book and toy packaging.For our plastic-based packaging,all markets are included except for Israel,Latin America,Turkey and Thailand.Renewable sources refer to material that is composed of biomass from a living source and that can be continually replenished.Renewable applies to plastics only,not fiber.Source:ISO 14021:2016 for plastic,ASTM 6866 or ISO 16620-2.Fiber-based packaging made from 100%recycled sources must be third-party verified,unless certified under a Chain of Custody Forest Management standard.McDonalds requires all wood fiber sourced from Argentina,Cambodia,China,Indonesia,Laos,Malaysia,Russia and Vietnam to be Forest Stewardship Council(FSC)certified or FSC-controlled wood sources with full chain of custody certification.Perfluorinated compounds are known to be historically persistent in the environment.McDonalds commits to not intentionally adding fluorinated compounds through our processes,but fluorinated compounds present in the local environment make it difficult to remove all traces of fluorine from packaging.Please refer to our Nature,Forests&Water web page for additional definitions.Exclusions:Primary fiber-based packaging in food packaged off-site of McDonalds restaurants,tray liners and limited locally sourced items.28 In 2022,we saw a decrease in the percentage of our primary guest packaging sourced from renewable,recycled or certified materials as compared to 2021 due to deployment of packaging materials not yet compliant with our goal standards.We know progress in this space is not always linear and we intend to continue making supply chain improvements to meet our packaging sourcing standards and remain committed to our 2025 goal.29 Non-structural components of packaging vary based on the packaging but may include adhesives,inks,overprints,varnishes,retention agents or binders,processing aids,impact modifiers,nucleating and clarifying agents.We continue to monitor industry standards on these components and opportunities to work toward making any part of our packaging,including non-structural components,more sustainable.30 Toys:Scope:Inclusive of all toys.Fiber-based toys or fiber components in the toys:100rtified fiber required.All other materials:McDonalds ambition is to reduce the use of virgin fossil fuel-based plastics,offer sustainable toys by the end of 2025 and not manufacture electronics and batteries in Happy Meal toys globally.For bio-and plant-based plastics to be considered sustainable for McDonalds,a minimum of 60%of plastic weight is required to come from recycled or renewable content or a combination of recycled and renewable content,though in many practical applications we anticipate that percentage will be much higher.The remaining 40%may be conventional fossil fuel-based material.These thresholds were developed in conjunction with input from NGOs,external manufacturing partners and scientists,and based on an assessment of sustainable toy and packaging industry leaders so that our targets reflected current sustainable engineering capabilities to maintain safety and functionality.Our efforts will result in an approximate 90%reduction in virgin fossil fuel-based plastic use against a 2018 baseline.Fiber-based packaging made from 100%recycled sources must be third-party verified,unless certified under a Chain of Custody Forest Management standard.Source:ISO 14021:2016.McDonalds requires all wood fiber sourced from Argentina,Cambodia,China,Indonesia,Laos,Malaysia,Russia and Vietnam to be Forest Stewardship Council(FSC)certified or FSC-controlled wood sources with full chain of custody certification.The thresholds described above do not include the presence of adhesives,glues,inks,paints and coatings.31 Markets with advanced infrastructure:Mature waste and recycling infrastructure at a national level that has(1)recycling infrastructure network across the entire market,(2)multiple materials being recycled within this national infrastructure network,(3)existing legislation on recycling and(4)high customer awareness of waste and recycling.At the end of 2022,that included 21 markets where McDonalds operates.32 Fluorinated compounds.Scope:Inclusive of all markets except for Israel,Latin America,Turkey and Thailand,and Happy Meal book and toy packaging.Renewable sources refer to material that is composed of biomass from a living source and that can be continually replenished.Renewable applies to plastics only,not fiber.Source:ISO 14021:2016 for plastic,ASTM 6866 or ISO 16620-2.Fiber-based packaging made from 100%recycled sources must be third-party verified,unless certified under a Chain of Custody Forest Management standard.McDonalds requires all wood fiber sourced from Argentina,Cambodia,China,Indonesia,Laos,Malaysia,Russia and Vietnam to be Forest Stewardship Council(FSC)certified or FSC-controlled wood sources with full chain of custody certification.Perfluorinated compounds are known to be historically persistent in the environment.McDonalds commits to not intentionally adding fluorinated compounds through our processes,but fluorinated compounds present in the local environment make it difficult to remove all traces of fluorine from packaging.Please refer to our Nature,Forests&Water web page for additional definitions.Exclusions:Primary fiber-based packaging in food packaged off-site of McDonalds restaurants,tray liners and limited locally sourced items.The following geographies have been removed from the calculation(Israel,LATAM,Turkey and Thailand)as they are not centrally managed markets.33 Beef.Scope:Includes all beef suppliers to the McDonalds System and their raw material suppliers globally and all McDonalds restaurants owned and operated by the Company and its Franchisees that sell beef.McDonalds requires all beef raw material sourced from high-deforestation priority regions to comply with McDonalds Deforestation-Free Beef Procurement Policy and meet the requirements as outlined in McDonalds Commitment on Forests.Countries with regions currently identified as high priority for beef include Brazil,Paraguay,Argentina and Australia.Exclusions:Beef used as secondary ingredients in McDonalds products,for example,as flavoring in a sauce.34 Soy(for chicken feed).Scope:Includes all soybean volume used in the feed of chicken sourced for McDonalds products by all chicken suppliers to the McDonalds System and all McDonalds restaurants owned and operated by the Company and its Franchisees that sell chicken.Europe refers to Austria,Azerbaijan,Belarus,Belgium,Bosnia,Bulgaria,Croatia,the Czech Republic,Denmark,Estonia,Finland,France,Georgia,Germany,Greece,Herzegovina,Hungary,Ireland,Italy,Kazakhstan,Latvia,Lithuania,Luxembourg,Malta,Moldova,the Netherlands,Norway,Poland,Portugal,Romania,Serbia,Slovakia,Slovenia,Spain,Sweden,Switzerland,the U.K.and Ukraine.Countries with regions currently identified as high-deforestation priority regions for soy include Argentina(Chaco biome),Brazil(Amazon and Cerrado biomes)and Paraguay(Chaco biome).Given the complexity of soy supply chains,we consider that,unless demonstrated,all of McDonalds sources of soy for chicken feed fall into high-deforestation priority regions,with the exception of chicken sourced in North America where soy used in chicken feed is locally produced and considered low risk.Exclusions:Soy used as an ingredient in McDonalds products sold in restaurants,for example,soy oil.35 Palm oil.Scope:Includes all palm oil(including crude palm oil,palm kernel oil,derivatives and fractions)sourced for McDonalds restaurants for use as restaurant cooking oil and all palm oil sourced by McDonalds sup
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4th edition February 2023Benchmarking the Middle East energy industryLeveraging data analytics to provide insightsBenchmarking the Middle East energy industry2 2Contents03Foreword04Executive summary08Hardware10Management systems(software)13Emergency control15Summary17Position papers20Contact informationBenchmarking the Middle East energy industry3“ForewordThis is the fourth edition of the risk quality benchmarking study for the Middle East energy industry.In 2013,Marsh issued a paper that set the context to compare the risk quality of the region against more than 500 global facilities.In 2015,Marsh repeated the study to understand developments in the landscape,and in 2018,a comparison of the evolution from 2014 to 2017 was carried out to examine changes in the region.In this report,Marsh assesses the changes that have happened in the region between 2013 to 2021.This paper presents the regional trends within risk quality in the energy industry in the Middle East,with a comparative view of global peers.The objective is to give industry operators and insurers an understanding of the risk quality across the industry.This includes the impacts of marked global topics,such as climate change,and the increased relevance of topics that are becoming more prevalent such as environmental,social,and governance considerations,digitalization,and the effects of the COVID-19 pandemic.Marshs risk ranking system provides an absolute measure of risk quality when compared against a defined set of criteria,while benchmarking determines a clients(or even a regions or industrys)position relative to its peers.The proprietary systems have been developed and enhanced over the past 30 years and are informed by the views of both Marshs risk engineers and underwriters.Marsh developed its benchmarking tool to provide a proactive risk improvement approach based on current standards and best practice,in sharp contrast to improvement plans,based on historical performance.For many of our clients,these benchmarking reports have already proved to be a catalyst for change.Since the last benchmarking report in 2018,Marsh has developed new analysis methods and tools that have contributed to an enriched view of the global and Middle East energy industry.These new tools include a catalogue of 2,000 risk ranking surveys from 800 sites across five continents.These tools,data,and Marshs comprehensive risk engineering offerings,continue to contribute to improved risk quality in the region.DAVID CAUSIConsulting and analytics risk engineering leader Middle East and AfricaBenchmarking the Middle East energy industry4Benchmarking the Middle East energy industry4Executive summaryThere has been continued improvement in the risk quality of Middle East oil,gas,and petrochemical facilities compared to the global industry.It is particularly notable that in many areas the rate of change in the Middle East region continues to increase,whereas the global industry risk quality is in relative decline.While risk quality in the Middle East improved between 2013 and 2021,there have been minor fluctuations over the last 10 years,as seen in the 2018 study.These fluctuations were most notable during 2020,a time characterized by the global COVID-19 pandemic,where there was a perceived decline in risk ranking quality.1Benchmarking the Middle East energy industry5Fig 01|Overall benchmarking scores Middle East vs global 2013-2021 0.5 1 1.5 2 2.5 3 3.5 420172015201320210201720152013202120172015201320212021201720152013OverallHardwareSoftwareEmergency controlMiddle East Global Benchmarking the Middle East energy industry6Since 2020,operators in the Middle East have been more proactive.Measures have been established that allow energy operators to bring in specialized staff for key tasks,reducing the likelihood of postponement in planned general maintenance and turnaround.During the COVID-19 pandemic,a crucial topic was staffing assessment and identifying the minimum staffing required to run operations safely.Marsh engineers and risk engineers from the underwriting community played an important role in supporting operators in assessing and managing risks in this challenging period.As we found in our 2015 study,the most noteworthy improvement in the region is once again in emergency control,where scores have moved from the lower middle quartile to the upper middle quartile between 2013 and 2021.Historically,Middle East facilities invested heavily in hardware(such as fire water networks and fire and gas detection),but these have not always been fully maintained or well operated.The data in Figure 02 indicates that risk engineering efforts in the region have successfully focused on emergency control management systems,an area where previously Middle East facilities rated behind their peers.The collaboration between governments and industry has been particularly important in developing civil defense systems for large industrial cities,resulting in world-class mutual aid associations.3.3-3.14.12.412.00.64.7-0.6-4-2024681012SoftwareHardwareEmergency controlOverallPercentage improvementGlobalMiddle EastFig 02|Overall percentage improvement 2021 vs 2013This approach has strengthened the capability of operators to respond to large emergency scenarios,typically characterized by the limited likelihood of occurrence but,at the same time,extreme consequence in terms of direct damage and production losses.The high risk improvement recommendation completion rates across emergency control topics,by some of the large Middle East regional operators,are likely to be a significant contributing factor that has enabled the region to achieve such a dramatic change compared to the rest of the world.This suggests a high degree of integration between risk engineering advisers and energy operators in the region compared to other parts of the world.Additionally,it shows the improved maturity of safety culture in the region,as energy operators use risk engineering surveys to benchmark themselves against industry peers and implement improvements to reach the top quartile.A general improvement in management systems(software)has been observed,compared to previous years,thanks to initiatives established by the different companies operating in the region.Knowledge transfer to national staff and identification of safety culture as a fundamental element of the competencies framework,are major focus areas that have played a crucial role in improving the overall management systems score across the industry.Benchmarking the Middle East energy industry7Digitalization has supported this improvement,enabled by significant investment in the past 10 years.From a global perspective,the Middle East region is playing a leading role in promoting new technologies and systems.The digital transformation brings considerable progress in efficiencies for different work processes.However,such transformation comes with its own risks.Risk associated to the transfer of responsibility from human to machine,cyber risk,data management,and knowledge retention,are more prevalent as the industry undergoes a digital transformation.Hardware remains a key strength in the region,benefiting from the fact that most refineries and petrochemical sites have an operational history shorter than 15-20 years,with an average of 10-12 years.This compares favorably to other regions where facilities are significantly older and also plays a crucial role in integrity and engineering standards,as more modern construction standards can considerably mitigate risk escalation,in terms of congestion and confinement.Most compellingly,overall scores for global risk ranking quality decreased from 2013 to 2021,whereas the Middle East has seen an increase in risk ranking quality.Continued investment and improved work processes within the region show a commitment to addressing risk improvement.Fig 03|Middle East industry risk qualityRisk quality category2013 quartile2015 quartile 2017 quartile2021 quartileOverallLower-middleUpper-middleUpper-middleUpper-middleHardwareUpper-middleUpper-middleUpper-middleUpper-middleSoftwareLower-middleUpper-middleLower-middleUpper-middleEmergency controlLower-middleUpper-middleUpper-middleUpper-middleBenchmarking the Middle East energy industry8HardwareHardware continues to be a key strength,reflecting continued investment in new projects and robust investment in asset management and maintenance for existing facilities.In addition,refineries and petrochemical sites have an average operational history of 10-12 years,compared to other regions where facilities are significantly older.A facilitys age can play a part in the integrity of equipment,with equipment having yet to reach the time of increased failure rates on a typical reliability curve.Recently constructed facilities also benefit from the latest construction standards,bringing significant mitigation versus risk escalation,particularly in congestion and confinement associated with process unit layout.Fig 04|Hardware benchmarking Middle East vs global 2021 vs 2013Location/climateEngineering standardsSite layoutProcess layoutFireproofingDrainage,kerbing,effluentProcess buildingsControl roomsAtmospheric tankagePressurized tankageRefrigerated tankageProcess controlPressure relief and flareUtility reliabilityMachinery featuresFired heater combustion safeguardsRoad and railJetty operations 0.5 1 1.5 2 2.5 3 3.5 40Middle East 2013Middle East 2021Isolation,depressuring,and dumpingGlobal 2021Benchmarking the Middle East energy industry9Fig 05|Hardware-rate of improvement 2021 vs 2013Globally,several new facilities have come online in recent years,with the Middle East receiving a significant share of such investments.Facilities in the Middle East have high levels of capital investment and often have expansive new land to build on.Areas covered by passive protection,such as fireproofing,are a common recommendation.New facilities have been built to higher standards,along with some retrofitting of older facilities,which has led to a significant improvement.Previously this recommendation had a high rejection rate,based on a presumption that the benefit of retrofitting existing facilities did not warrant the financial investment required.Middle East facilities have benefited from higher levels of active protection.There is increased utilization of deluge to protect hardware that includes a large hydrocarbon inventory and large or complex machinery where a shutdown could lead to production loss.Such deluge systems are standard in the region.The application of deluge to protect critical machinery has significantly increased,however,there is still potential for improvement at some facilities.As predicted in Marshs 2015 study,alarm management has improved,which is a key feature within process control.For new plants,there is often a significant period of time between start-up and achieving stable alarm management performance.Facilities that started operations in 2008 onwards have taken on board suggestions to invest in alarm management systems,which have now matured to achieving stable alarm performance.Yet,the Middle East still falls within the lower quartile for alarm response management processes and could develop this area to improve its scoring.In the Middle East region,power and water rely on government supply,so there is often no internal power production.From a benchmarking perspective,the lack of redundancy is viewed negatively,and some operators have progressed cogeneration plants for power and steam generation to limit this exposure.Facilities that can go into“island mode”for power supply are desirable and a common feature in European facilities.Machinery features have seen higher improvement rates for risk ranking quality,as presence and support from manufacturers of equipment is more prevalent than in other regions.Drainage,kerbing,and effluent have decreased scores as higher requirements are needed due to unprecedented weather events.Climate change is already affecting the Middle East,causing record-high temperatures,widespread floods,and storms.This is reflected in scores for location and climate,as extreme weather events become more frequent and these facilities potentially require redesign.-10-50510152025Percentage improvementPressurized tankageAtmospheric tankageControl roomsProcess buildingsDrainage,kerbing,effluentFireproofingProcess layoutSite layoutEngineering standardsLocation/climateRefrigerated tankageRoad and railFired heater combustion safeguardsMachinery featuresUtility reliabilityPressure relief and flareIsolation,depress,and dumpingProcess controlJetty operations9.2-1.21.23.96.84.8-2.6-5.611.88.2-4.5-3.11.6-3.8-1.3-1.8-6.30.1-2.97.14.33.16.6-5.521.31.38.5-4.47.29.55.86.711.211.2-1.615.2-1.6GlobalMiddle East0.2Benchmarking the Middle East energy industry10Management systems(SOFTWARE)Historically,the Middle East energy portfolio was perceived as having less rigorous management systems and or risk management practices than its global peers.This was often due to less robust implementation compared to international norms.Incremental changes have transformed the process safety and safety culture within the region,leading to software risk ranking scores moving to be in line with global peers.Improvements have also been made through joint venture projects between major oil and gas companies that support global standardization in software systems.This has increased the focus on internal auditing,which has been instrumental in driving improvements.Overall global scores for software have declined,while the Middle East region has seen a slight increase with significant contributions from housekeeping and maintenance.In the region,software was the least affected area during the dip in risk ranking scores in the remote surveys that characterized 2020,although it is yet to recover to the standards prior to 2020.Fig 06|Software benchmarking Middle East vs global 2021 vs 2013 0.5 1 1.5 2 2.5 3 3.5 40Corporate loss control policyErgonomics and operabilitySystems of workControl of ignitionMaintenance overviewMaintenance electricalMaintenance mechanicalMaintenance instrumentsInspectionHS&ESecurityHousekeepingQuality managementContractorsEnvironmental monitoringJetty softwareMiddle East 2013Middle East 2021Global 2021Recruitment and training(operations)Benchmarking the Middle East energy industry11The decrease in global software scores could be due to increased expectations of the industry.As the fourth industrial revolution accelerates throughout the industry,new digital technologies are required to improve process safety and reach newly defined industry standards.Alongside this,cultural transformation in process safety,and and reformed attitudes to accept change,are paramount for facilities to improve software risk quality.This type of transformation can be more complex to implement and maintain than finding investment for new technologies.Like hardware,software systems age.Investment to transform these systems to the latest technology,versus the perceived benefit,could play a role in decision-making.The Middle East has an advantage as a significant portion of its portfolio consists of recent developments.At the same time,older global assets may be required to maintain legacy data for its lifetime.Corporate loss control has seen a marked increase through the improvement of process safety management(PSM),helped by a push from the insurance industry to work within international framework standards,and the introduction of process safety departments.Risk engineers have highlighted improved investigation techniques,with more effective follow-up and tracking processes.These techniques are supported by Marsh risk engineers through process safety culture assessments(PSCA)and loss prevention seminars(LPS events).Housekeeping has seen significant development,as it is largely representative of the process safety culture transformation in the region.Improvements in“engineering”housekeeping can be partly attributed to increased attention given to leak detection and remediation(LDR).This has been highlighted by Marsh risk engineers and supported by national standards.For example,the regulatory body in Saudi Arabia is mandated to record fugitive emissions annually,which thereby promotes LDR implementation.Benchmarking the Middle East energy industry12Fig 07|Hardware-rate of improvement 2021 vs 2013Percentage improvementGlobalMiddle EastCorp.loss control policyRecruit.and training(ops)Site layoutErgonomics and operabilitySystems of workControl of ignitionMaintenance overviewMaintenance electricalMaintenance instrumentsInspectionHS&ESecurityHousekeepingQuality managementContractorsEnvironmental monitoringJetty software-10-8-6-4-20246810127.8-8.32.1-1.16.71.20-1.41.9-0.3-2.7-5.48.53.810.4-8.14.5-2.52.10.90-5.93.21.39.85.7-0.606.7-6.4-5.6-1.4-0.30Benchmarking the Middle East energy industry13Emergency controlEmergency control scores are the most noteworthy improvement in the region.These scores have moved from the lower middle quartile to the upper middle quartile between 2013 and 2021.The data indicates that risk engineering efforts in the region have successfully focused on emergency control management systems,despite Middle East facilities historically rated as behind their global peers.This development has been supported in the Middle East by collaboration between governments and industry to develop civil defense systems for large industrial cities,which has often resulted in world-class mutual aid associations.The approach has strengthened the operators capabilities to respond to large emergency scenarios,typically characterized by the limited likelihood of occurrence but at the same time,extreme consequence in terms of direct damage and production losses.An excellent mutual aid example is the Jubail Area Mutual Aid Association(JAMAA),where the Saudi Arabian government operates an advanced civil defense system in the industrial city of Jubail.Exercises in Jubail are conducted and coordinated with adjacent facilities.During these activities,facilities are scored and compared to others,encouraging facilities to improve against their peers.Fig 08|Emergency control benchmarking 2021 vs 2013Gas detectionFire detection and alarmFixed fire protectionFire water systemOn-site fire fighting serviceEmergency plansMutual aidMaintenance/testing 0.5 1 1.5 2 2.5 3 3.5 40Middle East 2013Middle East 2021Global 2021Benchmarking the Middle East energy industry14In the Middle East,there is little regulation around the frequency of exercises,such as fire drills.The region,like other regions,could benefit from more frequent exercises.Emergency planning has seen substantial progress.In 2017,emergency planning was in the lower middle quartile,with fire pre-plans,in particular,requiring advancement.However,we note that emergency planning seen significant development since 2013,with the greatest percentage improvement of all emergency control risk quality features.In the region,hardware associated with emergency response benefits from sizable investments made in new facilities,investments that are less accessible to older facilities elsewhere in the world.This investment in emergency control,has resulted in the region moving to the upper middle quartile for this topic.Fig 09|Emergency control-rate of improvement 2021 vs 2013GlobalMiddle EastPercentage improvementFire detection and alarmOn-site fire fight.ser.Emergency plansMaintenance/testing-505101520Gas detection10.52.4Mutual aid18.2018.8-1.0Fire water system15.3-0.9Fixed fire protection9.0-0.27.95.61.1-1.316.1-0.1Benchmarking the Middle East energy industry15SummaryFollowing significant investment and an environment that has promoted a process safety culture,the Middle East has seen progress in all areas since 2013.This is particularly notable given the slight global decline in risk quality.New projects and retrospective application of more modern safety features has meant the Middle East energy industry has advanced,even as global expectations are redefined.As in previous reviews,the continued improvement in hardware features has been driven by significant investment in new projects.A favorable economic environment,compared to other regions which are more sensitive to the impacts of oil price volatility,has supported this improvement.The average score of the Middle East region is further elevated by improvements in projects that include key hardware features in line with the latest international engineering standards.The effects of climate change in the Middle East(and all regions)will need considerable attention as increased risks,such as flooding,drought,and heat will drive the need for further investment to mitigate these risks.15Benchmarking the Middle East energy industry16Risk engineers and insurers often consider the features embedded in the software category as the most important in determining risk quality.Focused risk engineering efforts and greater commitment towards risk reduction from several Middle East sites are likely to have significantly contributed to the regions rating improvement,which was at a faster rate compared to its global peers.Topics associated with operational excellence and asset integrity are focus areas for risk engineering teams in the region and globally.These are recognized to be the most recurrent causes of large losses(see The 100 largest losses in the hydrocarbon industry).The most noteworthy improvement in the region continues to be in emergency control scores,which have moved from the lower middle quartile in 2013,to the upper middle quartile in 2021.While the global industry has remained constant in its overall emergency control risk ranking,a key positive for the Middle East is the collaboration between governments and industry to develop civil defence systems for large industrial cities,resulting in world-class mutual aid arrangements.Within emergency planning,the frequency of fire drills remain an area for improvement in the coming years.Since 2018,Marsh has developed tailored and detailed risk engineering services(such as deep dive reports)to help the industry improve in these highly critical topics.In the Middle East regional risk engineering program,these tools and services are acknowledged to be valuable to both insurers and energy operators.Marsh believes that this consultancy-tailored approach,focused on topics characterized by high loss rates,will gradually replace the conventional risk engineering approach.Benchmarking studies and other value-added services,such as standard recommendation themes analysis,have enabled Marsh,together with our clients,to identify the key areas for improvement at regional,company,and site level.The expectation is that the Middle East region will continue to see more improvement over the next few years,potentially moving into the top quartile,if improvement rates are sustained.Benchmarking the Middle East energy industry17Position papersMarshs global risk engineering team regularly produces position papers on a variety of issues faced by those in the energy industry,ranging from process safety to fire pre-plans.These papers are aimed to help clients improve their operational risks,and overall corporate risk profile.Marsh position papers are distributed to clients globally.They are available to download from our website,Benchmarking the Middle East energy industry18Remotely operated emergency isolation valves(ROEIVs)ROEIVs are safety-critical equipment.Their primary purpose is to provide effective and timely isolation of plant items containing hazardous substances in the event of the primary containment system failing(including leaks from pipework and associated fittings,and pump seals).Pre-start-up safety reviewThis position paper covers the value of the PSSR process when to conduct one,who should be involved,the steps in a PSSR,monitoring,and checklists.Process safety performance indicators(PSPI)This paper explores how the development of an effective PSPI system can provide a clear view on how well process safety is being managed at a site and across the wider organization.Fire pre-plansThe scope of this position paper includes the description and purpose,the ownership and development,and the format and content of fire pre-plans.It is applicable to any facility handling hydrocarbons and toxic materials.Atmospheric storage tanksAs a result of the Buncefield incident in December 2005,more guidance has been provided to designers and operators of facilities regarding atmospheric storage tanks.The guidance has been included within this position paper.Managing the defeat of safety instrumented systems(SIS)trips and alarmsSIS are used extensively in the hydrocarbon processing industry to protect against hazardous events.A system for managing the defeat of SIS trips and alarms should be robust enough to cater for all eventualities;details on how to best manage this process are covered in this position paper.Benchmarking the Middle East energy industry19Management of change(MoC)It is well-documented that poor control of plant changes have contributed significantly to large loss events in the energy industry.The need to avoid such incidents and maintain good process safety management is the reason why all sites operating process plant need a robust MoC process as described in this position paper.Shift handoverA lack of effective information transfer has led to serious process safety incidents in the energy industry.This position paper provides guidance on how to establish accurate and reliable communication of information from one set of shift workers to another.Process hazard analysis(PHA)Marsh Specialtys position paper on PHA looks at the steps that can be taken to minimize the risk of a serious incident.Many of the PHA techniques discussed in this paper are considered to be well established within the industry,and standardized templates have been developed for organizations.Management of temporary repairsInstallation of temporary repairs in the energy and power industry has been an integral activity that has enabled businesses to manage ongoing plant operation for decades.This position paper reviews common repair techniques and focuses on the management,inspection,audit,and life-cycle analysis of a variety of temporary repair types.Process isolation This paper defines the key attributes and processes required to establish a good process isolation management system in the oil,gas,and petrochemical industries.The paper also focuses primarily on operating site activities that require a break of the pressure envelope on systems that contain hazardous fluids,or critical utilities that have the potential to lead to significant losses.Pneumatic pressure testingIn this paper,we summarize some of the key considerations when conducting a pressure test on process equipment.Common practical limitations,and respective solutions,are also described.Benchmarking the Middle East energy industry20Contact informationFor further information,please contact your local Marsh office or visit our website 971 54 Jenni MorrisonRisk Data Analytics Specialist 971 50 Ian RoyMiddle East Engineering Leader 971 54 David CausiMiddle East&Africa Consulting&Analytics Risk Engineering Leader 971 56 Guy BessisGlobal Head Business DevelopmentAuthorKey contactsThis is a marketing communication.The information contained herein is based on sources we believe reliable and should be understood to be general risk management and insurance information only.The information is not intended to be taken as advice with respect to any individual situation and cannot be relied upon as such.This publication contains third party content and/or links to third party websites.Links to third party websites are provided as a convenience only.Marsh is not responsible or liable for any third party content or any third party website nor does it imply a recommendation or endorsement of such content,websites or services offered by third parties.Marsh Specialty is a trading name of Marsh Ltd,authorised and regulated by the Financial Conduct Au
2023-12-29
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2023 State of Flood ReportThe Way to Flood Resilience2023 State of Flood Report2 2ContentsSection 1Foreword:The Power of Public and Private Partnerships 4Executive Summary 6Section 2Flood Market Overview 7Section 3Flood Risk Rising 10IN FOCUS:Agents as Trusted Advisors 17Section 4Actions for Public and Private Sectors 19Section 5 Driving Toward Resilience 242023 State of Flood Report3“Unity is strengthwhen there is teamwork and collaboration,wonderful things can be achieved.”Mattie StepanekAs one of the worlds most frequent and devastating perils,flood is indiscriminate in the damage it does to communities.Risk levels related to climate change,land use,and population concentrations,among others,are changing rapidly.And as floods increase in quantity and severity,these risks are compounded.Thus,its essential to plan for the future of floods.Businesses,individuals,and society at large are all at risk of loss when floods occur.The time and effort needed to recover after an event depend largely on the resilience of those who experience and respond to flooding events.This global threat requires resilience to minimize damage during a flood catastrophe and to overcome the destruction afterwards.For these reasons,solving flood risk urgently requires increased collaboration by the public and private sectors.Flood insurance has been available for many years through public and private sources including government programs such as the US National Flood Insurance Program(NFIP)and the insurance industry.Other countries approach flood insurance in a variety of ways,but in most geographies flood insurance is underutilized,resulting in protection gaps.Unfortunately,the gap between economic and insured losses from flood has been widening.Between 2007 and 2021,only 17%of global flood losses were insured,according to Marsh McLennan analysis.Working together,the public and private sectors can speed recovery following flood events and increase communities resilience to future risks.This is especially needed in communities where insurance take up rates are low due to availability,affordability,or complacency.Its a balancing act between the two sectors to ensure entrepreneurship produces long-term profitability that alleviates the strain on taxpayers footing the bill for recovery and resiliency measures.One of the best ways to expand on public and private partnerships is through complementing a government-sponsored flood insurance program with private flood insurance products.This market offers an alternative that allows consumers to select the option that best suits their needs.It also lessens the burden on taxpayers and de-risks the public sector.Another prime example of the success of public/private partnerships is community-based catastrophe insurance(CBCI),an innovative and flexible approach to resilience.CBCI is a disaster insurance program arranged by a local government,a quasigovernmental body such as a special-The Power of Public and Private PartnershipsCollaborative solutions are critical to promoting flood resilience“We are working on public and private solutions to flood risk today,and we are focused on improving flood resilience for the long term.”KEVIN TOBINPresident and CEO of Torrent Technologies,Inc.12023 State of Flood Report4POTENTIAL BENEFITS OF CBCIReduces the communitys contingent disaster liabilitiesEnhances the communitys credit risk profileSpeeds the insured individuals and businesses to recoverySupports the communitys post-disaster economic revitalizationReduces premium costs by:Increasing buying power and securing volume discounts Enhancing data provision for risk analysis Reducing administrative costs Supporting means testingIncreases insurance availability by:Potentially lowering premium costs Guaranteeing coverage post-loss Increasing confidence in risk assessment and peril modeling Retaining and attracting catastrophe capacityEnables capture of premium discounts for community-scale and household mitigation effortsSupports financing of risk reduction activity via premium surchargeEnhances decision-making around risk reduction through risk analytics and pricingEnhance Financial ResilienceProvide Affordable and Available CoverageIncentivize Community-level and Individual Risk Reductionpurpose district or a community group covering individual properties within the community.CBCI has the potential to enhance the financial resilience of communities and their residents,provide affordable and reliably available disaster insurance,and create incentives for community-level and individual risk reduction.CBCI can play many roles in the dynamic ecosystem of existing public and private catastrophe insurance mechanisms.A CBCI policy could be for a single hazard,such as flood,or for multiple hazards,such as both flood and wildfire.Communities determine if they are willing and able to pay the costs of a CBCI program through assessments and/or other public funds in exchange for the broad benefits.This includes not just the primary benefit of improved financial recovery from disasters but also benefits from heightened understanding of the risks the community faces,larger incentives for risk reduction,and a more comprehensive risk management program.In our 2022 State of Flood Report,we highlighted a CBCI program in New York City that expands coverage to low-and middle-income households through innovative parametric insurance insurance that pays a fixed amount on a claim triggered when an already established threshold is met.It also mitigates catastrophe risks with investments in resilience.New Yorks program is a partnership between Marsh McLennan and global reinsurer Swiss Re,the National Science Foundation,the Mayors Office of Resilience,the Environmental Defense Fund,and other organizations.The 2023 State of Flood Report examines the current condition of government-sponsored and private flood insurance programs,the evolving nature of flood risk,steps that public and private sector organizations can take to mitigate this risk,and ways Torrent is making flood insurance more accessible.Our hope is the State of Flood Report will inform and inspire policymakers,communities,insurance agents,and others to deepen their understanding of flood risk and come together to develop long-term solutions that increase resilience.Torrent and our colleagues at Marsh McLennan recognize the power of public/private partnerships,but those cannot thrive without continuing leadership and vision in both sectors.A key element required is trust between public and private entities,but also between those parties needed to close this gap,including individuals,communities,organizations,and society as a whole.Kevin Tobin President and CEO,Torrent Technologies,Inc.2023 State of Flood Report5Executive Summary:Flood Insurance in Review As climatic conditions shift and worsen,natural catastrophes are becoming more severe.They also are becoming more interconnected,exacerbating the impact of flooding.For example,persistent drought is worsening wildfires,which in turn deprive landscapes of vegetation and other natural barriers to flood.A cycle of drought coupled with atmospheric rivers is causing severe flash floods in many areas.With more communities at risk,the need for public/private partnerships to close the protection gap and develop long-term flood resilience is greater than ever.During 2023,several instances of extreme precipitation caused massive flooding.These included:Tropical Storm Hilary,the first such storm to hit Southern California in 80 years;record flooding in western Kentucky;historic rainfall in northern New England;inundation and landslides in Italys Emilia-Romagna region;a rainstorm that triggered evacuations in central Greece following a prolonged drought;and the catastrophic flooding in Libya as a result of dam failure.Catastrophe loss frequency and severity have driven up reinsurance rates for six consecutive years,according to Marsh McLennans reinsurance broker Guy Carpenter.These conditions have added pressure to commercial insurers and diminished global capacity for insurance against catastrophes and other weather-related perils.Nevertheless,Torrent continues to see growth in the private flood insurance market.Worldwide,there is an ongoing need for more options in standalone flood insurance.Closing the protection gap and improving resilience will require even more partnerships between governments and private industry.Working together,the public and private sectors can improve community flood mitigation efforts and speed recovery following flood events.2023 State of Flood Report6Flood Market OverviewFinancing for flood risks is available in many countries,mainly under government-backed programs.A private market for flood insurance has been growing steadily,especially in the US and UK,where more private flood insurance products and parametric options are becoming available.Elsewhere,however,standalone flood insurance from any source private or public remains limited.THE NATIONAL FLOOD INSURANCE PROGRAMThe main source of flood insurance in the United States is the National Flood Insurance Program(NFIP),which Congress created in 1968 and requires periodic congressional reauthorization.The Federal Emergency Management Agency(FEMA)administers the NFIP.At publish date,President Biden had signed legislation extending the NFIPs reauthorization through November 17,2023.Congress last multiyear reauthorization of the NFIP expired in 2017.Since then,there have been 25 short-term extensions and three brief lapses.DISTRIBUTION OF NFIP POLICIESFederally backed flood policies are available through the following two channels:The Write Your Own(WYO)program is comprised of a group of nearly 50 insurers that use their own licensed agents and producers.FEMA authorizes the WYO insurers to act as fronting carriers and to service NFIP policies.NFIP Direct is a program that allows agents not appointed by WYO insurers to obtain flood insurance directly through the NFIP.2023 State of Flood Report72PRIVATE FLOOD INSURANCEIn the decades before the NFIP was created,the private insurance market abandoned coverage for flood losses due to an unsustainable aggregation of claims.Recent improvements in risk technology and analytics have enabled private insurers and reinsurers to better understand flood risks.This has led to a steadily growing,private flood insurance market in the US.Types of private flood insurance currently available include:Primary Residential and Commercial FloodThis type of insurance can mirror NFIP coverage terms or provide enhanced coverage for residential and commercial properties.NFIP Versus Private Market Options for Residential Flood CoverageStandard NFIP CoveragePrivate Market Coverage*Dwelling limits of$250,000Dwelling limits up to$2 million Contents limits of$100,000Contents and personal property limits up to$1 millionContents-only limits for renters up to$100,000Personal property up to$1 million30-day waiting periodNo waiting period or limited period,e.g.,7 daysNo additional living expenses are currently offered via NFIPPotential additional living expenses up to$250,000 Some homeowners insurers also provide coverage for flood via endorsement*Examples of private primary residential flood coverage NFIP Versus Private Market Options for Primary Commercial FloodStandard NFIP CoveragePrivate Market Coverage*Building limits of$500,000Building and contents combined limits up to$10 millionContents limits of$500,00030-day waiting periodOften a limited period,e.g.,7 daysBusiness income coverage is unavailable at the momentBusiness income coverage is often available privately*Examples of private primary commercial flood coverage 2023 State of Flood Report8Commercial“All-Risk”A broad form of coverage designed for large businesses,all-risk policies can provide protection for different kinds of property risks,including flood and business interruption.The amount of coverage available in these policies is typically much greater than a flood-only policy.In recent years,however,underwriters have put more scrutiny on flood in all-risk programs,and in some instances,reduced coverage for specific locations.All-risk coverage for flood is usually unsuitable for small businesses and does not apply to homeowners.Excess FloodThis form of private coverage sits atop underlying private primary coverage or an NFIP policy.Excess flood insurance is available to individuals and businesses,and it can provide higher limits of protection,as well as enhanced coverages such as additional living expenses and business interruption.Contents-only CoverageMany people renting homes,apartments,and condominiums do not have contents-only flood insurance.This form of private flood insurance is an opportunity to help renters achieve financial peace of mind.Other nations have also set up government-backed flood insurance programs,with varying features.Here is an overview showcasing a handful of programs:UK:Flood Re is a government-provided reinsurance scheme for the flood component of homeowners insurance.Unlike other national flood insurance programs,Flood Re is designed to smooth the transition to a private flood insurance market by 2039,with review of the programs progress every five years.The program was conceived in 2014 as a partnership between the UK government and the insurance industry to keep flood insurance available and affordable for homeowners.In its 2023 Transition Plan Report,Flood Re said its“Build Back Better”campaign of investing in flood defenses,which launched in 2022,is ensuring flood-prone properties are rebuilt to be resilient to future flooding.According to Flood Res research,each 1 invested in flood defense saves 5.60,resulting in at least 1.1 billion saved annually.Canada:In March 2023,Canada announced government funding for its first National Flood Insurance Program,which will launch sometime in 2025.Details are still to be worked out between federal authorities and the insurance industry,but the program is expected to emulate the UKs Flood Re.This is a timely idea,as Canada recently has experienced extreme weather and wildfires,which exacerbate inland flood risks.Australia:Until the establishment of a cyclone and flood damage reinsurance pool in July 2022,the flood peril in Australia was largely left to private insurers.Variable definitions of floods and differing levels of coverage led Australia to require a standard definition of flood for all insurance policies.Excluded from the cyclone reinsurance scheme are non-cyclone severe weather events,including seasonal flooding.2023 State of Flood Report9Flood Risk RisingThe frequency and severity of floods around the world are increasing,as demonstrated by recent events.In 2022 and 2023,for example,extreme rainfall caused severe flooding that killed and displaced thousands of people in Pakistan and Australia.Flooding in Libya from massive downpours led to dam failure and resulted in loss of life for tens of thousands of people,while displacing many others.This tragically demonstrates the role of infrastructure in preventing these losses.Persistent flooding in Indonesias capital,Jakarta,has led the country to begin relocating the capital to a higher elevation on the Island of Borneo,800 miles away.Surrounded by rivers that spill over during monsoon season,sinking land plus increasing rainfall and rising sea levels,and ever-expanding urbanization,Jakarta is vulnerable to a constant state of flooding and the health hazards that accompany each flood.Italy,Turkey,Bulgaria,and Greece experienced floods and mudslides that claimed lives and destroyed businesses.Sadly,many of those affected did not have flood insurance or other means to mitigate their flood damages.In the US,flooding remains the#1 natural disaster,with zero boundaries to season or location.The usual patterns of floods are shifting.This is true on a global level as well.2023 State of Flood Report103Japan27HY%Australia30IV%Brazil151%South Africa17!3%United States11$2T%India34Yt%China6%GermanyPresent day2C warming scenario3.5C warming scenarioGlobal averages186E%Population of Risk at Present and Under 2C and 3.5C Warming ScenariosInfrastructure at Risk at Present and Under 2C and 3.5C Warming ScenariosPresent day2C warming scenario3.5C warming scenario61R&B7HA#%International airportsPower infrastructureInternational portsTrade outflowsSeatsGeneration capacity2023 State of Flood Report11“Even if you are dry and are away from the water,you can still feel the effects of flooding from supply chain disruptions,infrastructure failure,loss of crops,and hardship to the economy.This is the unprecedented,changing nature of risk.Risk levels are amplified by climate change,nature loss,and the concentration of people and assets in flood-prone areas.Conventional strategies are insufficient to address rapidly changing risk levels.This is the reason why we need a shift from a reactive to a proactive approach to flood resilience.”Swenja Surminski Managing Director,Climate and Sustainability,Marsh McLennan2023 State of Flood Report12Extreme precipitation mostly in the form of rain,but in some areas,snowfall is becoming common in the US.A report by the First Street Foundation,“The 8th National Risk Assessment:The Precipitation Problem,”concludes that high-severity floods are occurring with much greater frequency affecting millions of Americans,including urban areas far from rivers or coastlines.Flood risk maps and models may not fully capture these changes in flood risk.Examples of Common Failures in Flood Risk Management Governance Land Use and Infrastructure Finance Failure to account for changing risk levels Limited appreciation of socioeconomic implications Ineffective incentive systems Permitted maladaptation and continued risk creation Overreliance on gray infrastructure and underinvestment in nature-based solutions Inadequate infrastructure maintenance efforts Disruption to insurers business models and reduced access to coverage Challenges in persistent lack of resilience measurement and indicators Chronic underinvestment in risk reduction and preparedness2023 State of Flood Report132023 Significant Record Flood Events2023 State of Flood Report14Floridas Big Bend:8/30/23 Hurricane Idalia made landfall as a Category 3 hurricane.In addition to damaging storm surge,excessive precipitation transpired well inland from the Big Bend region.As Idalia evolved into a post-tropical storm,rainfall amounts in excess of 10 inches were recorded across the Carolinas and Georgia;the 13.55 inches measured in Holly Hill,South Carolina,was the highest total recorded.Western Kentucky:7/19/23 Record rains caused catastrophic flooding in four counties of western Kentucky.Fort Lauderdale,Florida:4/13/23 In a six-hour period,more than 25 inches of rain fell,overwhelming local water infrastructure,triggering flash floods,and forcing the citys airport to close.Vermont:7/12/23 Historic rainfall led Vermont to declare a state of emergency for all of its 14 counties.The heavy precipitation also caused flooding in adjacent states,including New Hampshire and Massachusetts.New York City:9/29/23 Excessive rainfall produced multiple inches of rain per hour,causing historic flooding across many places in New Yorks metropolitan area.Source:CoreLogic,Accuweather,National Weather Service,and Guy CarpenterArizona:8/22/23 Remnants of Tropical Storm Hilary dumped up to 2.5 inches of rain in two hours,causing catastrophic flash flooding and prompting evacuations near Grand Canyon National Park.Southern California:8/19-21/23 Tropical Storm Hilary was the first such storm to hit this region in more than 80 years,setting records for rainfall in Los Angeles and other locations.The standard for severity established by FEMA and defined by flood maps as Special Flood Hazard Areas(SFHAs)is the 1-in-100-year flood.This is an expression of probability,meaning a flood event that has a 0.01%chance of occurring.The First Street Foundations analysis,however,determined that this understanding of flood risk is outdated,and that a 1-in-100-year probability should no longer be considered accurate.The First Street Foundation noted severe flood events have been occurring in succession during the past 20 years.Notably,the First Street Foundation report suggests another impediment to understanding flood risk due to extreme precipitation is the near-universal focus on rainfall within a 24-hour period.Why is this deceptive?Because often excessive rain is not spread out over a 24-hour period,which would make it easier to be absorbed or channeled to stormwater systems in urban areas.Four inches of rain in 24 hours is entirely different from four inches of rain in two hours.The 24-hour measurement period obscures the reality:Intense precipitation in these shorter bursts overwhelms local infrastructure and topography leading to more frequent flooding.2023 State of Flood Report15PRE-WILDFIREVegetation helps soil absorb waterWILDFIRECharred soil is a barrier that blocks waterRAINWater flows downhill or downstream of burned areasFLASH FLOODLow-lying areas can flood in hoursMUDFLOWSWatery mud and swift snowmelt can set off mudflowsFire Fuels FloodWildfire and drought compound flood risk.Loss of vegetation can divert water or reduce the grounds ability to absorb it.With the prevalence of these conditions in many parts of the US,and a greater incidence of extreme precipitation,flash floods are happening more often,and in more areas.US 2022-2023 BillionDollar Weather and Climate DisastersDrought/Heat WaveFloodingHailHurricaneTornado OutbreakSevere WeatherWildfireWinter Storm/Cold WaveSource:National Oceanic and Atmospheric Administration(NOAA)This map denotes approximate location for each of the billion-dollar weather and climate disasters in the United States.*Potential billion dollar event.Western/Central Drought and Heat Wave 2022Minnesota Hail Storms August 11,2023North Central and Central Hail Storms May 9,2022 May 19,2022 May 6-8,2023North Central and Eastern Severe Weather July 22-24,2022 June 28-July 2,2023 July 16-21,2023 July 19-21,2023 Southern and Central Severe Weather April 11-13,2022 May 1-3,2022 April 15,2023 April 19-20,2023 April 25-27,2023 june 11-14,2023 June 15-18,2023 Texas Hail Storms February 21-22,2022 September 2023*Central and Eastern Winter Storm and Cold Wave December 21-26,2022Central Derecho June 13,2022Kentucky and Missouri Flooding July 26-28,2022Hurricane Ian September 28-30,2022Hurricane Nicole November 10-11,2022Western Wildfires Spring-Fall 2022Hurricane Fiona September 17-18,2022Southern Tornado Outbreak March 30,2022 April 4-6,2022Rockies Hail Storms,Central and Eastern Severe Weather June 21-26,2023Central Tornado Outbreak and Eastern Severe Weather March 31-April 1,2023 Central and Eastern Tornadoes and Hail Storms May 1012,2023California Flooding January-March 2023North Central Severe Weather May 11-12,2022 June 7-8,2022 April 4-6,2023 July 28-29,2023Northeastern Flooding and North Central Severe Weather July 9-15,2023Hurricane Idalia August 29-31,2023Hawaii Firestorm August 8,2023Northeastern Winter Storm/Cold Wave Februry 2-5,2023 Southern and Eastern Severe Weather March 2-3,2023 March 24-26,2023Hurricane Hillary August 2023*Hurricane Ian in 2022 displayed firsthand the critical nature flood insurance plays in recovery.NFIP data shows there were nearly 50,000 Ian flood insurance claims.Total payments to insureds were over$4.3 billion,with the average claims payment nearly$114,000.2023 State of Flood Report1617Flood is a global problem,but its impact is felt locally by families,businesses,and communities.Unfortunately,the percentage of property owners that lack flood insurance is high.According to the Insurance Information Institute(III),only 22%of homeowners report they are at risk for flooding and of those,only 78%purchased flood insurance.In addition to the misperceptions seen in the chart below,there are other reasons for the lack of uptake,including affordability in our inflationary times as property owners seek ways to cut expenses and need more adequate flood insurance products to help close the gap.For these reasons,insurance agents have a vital role to play in helping to manage the risk where floods happen.By serving as trusted advisors,agents offer guidance and help property owners better understand their exposure to flood,as well as the options for addressing it.Many individuals and businesses forgo flood insurance due to lingering misperceptions,including:MisperceptionRealityA homeowners or business policy will cover flood damage.Almost all homeowners policies exclude flood.Not all business policies cover flood losses;commercial property policies vary in the perils they will cover,and in some,flood is sublimited,which means its covered at a lower amount than the policy limit and subject to a higher deductible.If the property is not within a SFHA,it does not need flood insurance.Home loans that are federally backed generally require borrowers to have flood insurance if their property is in an SFHA,but the lack of a lending requirement is not a reflection of flood exposure.Indeed,FEMA notes about 40%of NFIP flood claims come from non-SFHAs.Disaster assistance funds can be used to repair damage to a property after a flood.Federal disaster assistance may take the form of Small Business Administration(SBA)loans,which must be paid back with interest,or disaster assistance grants,which generally are limited to$5,000.Even minor flood damage to a home or business is likely to far exceed that amount.In addition,it can take time to apply for and receive such funds.Flood insurance claim payments typically can be advanced or settled more quickly,but disaster assistance is an important complement.Its worth noting that disaster assistance rules usually require recipients to obtain flood insurance to remain eligible for future assistance.The area hasnt flooded recently,or isnt near a body of water.Flooding can happen anywhere,even inland and in areas of higher elevation.In fact,99%of US counties have experienced flooding,according to FEMA.The only option for flood insurance is the NFIP,and that doesnt provide adequate coverage.The NFIP is one source of flood protection,but the private insurance market is steadily growing,with a variety of new products and enhanced coverages.NFIP annually pays out billions of dollars in claims for dwelling and contents.After Hurricane Ian,for example,the average NFIP claim was$104,000,within or close to the limits available under the NFIP.In Focus:Agents as Trusted Advisors2023 State of Flood Report78%of US homeowners believe their property is NOT at risk for flooding18Relationships matter in insurance,and agents often have strong connections with homeowners and businesses in their communities.Talking with clients about their flood exposure and ways they can manage the risk is a good way for agents to demonstrate their value and enhance those relationships.Steps That Can Simplify Agents Ability to Act as Trusted Flood Risk Advisors Offer flood insurance with every policy quote for renters,homeowners,and businesses.Insist on clients signing a waiver if they decline flood insurance.Educate clients about flood risk and discuss their perspectives.Revisit flood coverage annually as part of account reviews.Include private flood insurance solutions to complement the NFIPs standard coverage.Make it easier to purchase flood insurance with auto-populated data and instant quote/bind from insurers.Torrent is leading the way to make flood insurance more accessible,with a growing number of product offerings,an intuitive website interface with enhanced auto-populate capabilities,and improved customer experience in all aspects of flood resilience,from buying policies to claims service.2023 State of Flood ReportActions for Public and Private SectorsWith flood risk rising,more communities are immediately exposed to flood events,and the number is growing rapidly as the threat escalates.Given these conditions,a goal of the public and private sectors should be to help communities achieve flood resilience.Government agencies working with private sector organizations can develop solutions that accomplish three important states of flood resilience:MitigationAt the local,state,and national levels,government and the private sector can enhance building codes to improve flood risk mitigation and strengthen defenses when flooding does happen.Green infrastructure as proposed by the US Environmental Protection Agency(EPA),for example,can provide a natural means of controlling both localized and riverine flooding.Designers and engineers,meanwhile,can explore ways to reduce the volume of stormwater flowing into streams and rivers,and to better visualize where to site properties to avoid floods.Natural hazard mitigation saves$4-$11 in avoided future losses for each$1invested.Source:National Institute of Building Sciences4192023 State of Flood ReportRecoveryPeople,businesses,and communities fare better following flood events when they can rebuild quickly.Flood insurance is a valuable means of protection that enables recovery and rebuilding.Infrastructure repair is essential for getting materials and services to people who need them.For example,roads and bridges must be restored as quickly as possible to get resources in and the dangers out.Governments and the private sector can make flood insurance easier to obtain and smooth the claims process for property owners,as well as their agents and brokers.In the US,the WYO program is an important channel for individuals and businesses to get NFIP protection,though its not the only one.Many private flood insurance options exist that complement the NFIP,and the list is growing.This is good news in the effort to help close the flood insurance gap.ResiliencePairing flood insurance with mitigation leads to better outcomes exemplified by the CBCI pilot in New York City and enables individuals,businesses,and communities to build greater resilience against loss due to flood damage.Building for past or even current weather patterns is no longer sufficient as climate change will create increasingly volatile and tumultuous storm activity in the years ahead.In order to reduce vulnerability to future flooding,resiliency must be considered at the community level.FEMA recently announced its program to build resilience across the US,providing additional resources for the most vulnerable areas.The program provides opportunities for private and public partnerships for mitigation and resilience projects a prime example of public and private collaboration efforts.BEHAVIORAL Risk information sharing,evacuation training,supply chain diversification,and othersENGINEERED Structural measures to control water and reduce the potential impacts of floodingNATURE-BASED The restoration,preservation,and management of natural capital (e.g.,ecosystem protection and soil rehabilitation)POLICIES AND REGULATIONS Building codes,mandatory resilience standards,risk disclosure requirements,and othersR&D AND DATA Advancements in risk analytics,modelling,monitoring,and forecastingRISK TRANSFER Traditional insurance and reinsurance,and innovative risk transfer solutions(e.g.,parametrics,risk pools)Portfolio of Established and Emerging Tools to Manage Flood Risk2023 State of Flood Report20Resilience incentivization is a roadmap conceptualized by the National Institute of Building Sciences(NIBS)that details these recommendations for incentivizing resilience efforts focused on flooding from excessive rainfall,also known as pluvial flooding:1.Develop a flood resilience building certification program.2.Pilot test an incentive program,such as discounts on mortgage fees for flood mitigation measures undertaken by homeowners,or insurers incorporating parametric insurance to more effiiciently protect against damages sustained by homeowners after experiencing a pluvial flood event.3.Test the conjecture that flood resilience has a market value.Do flood resilient features in homes provide a good return on investment at the time of sale?4.Engage private insurers to help them to accelerate their investment in resilience.NIBS provides a three-step approach to engaging private insurers and state insurance regulators on pluvial flooding,risk reducing mitigation actions,and relevance of private flood insurance.“However,as I saw firsthand during my time at FEMA,the government alone cannot address the resilience gap.It will take public and private stakeholders,each working to leverage their unique capabilities,resources,and programs for the greater good.While they may lack direct authorities(the“sticks”),many of these stakeholders hold the carrots that could prove pivotal in closing the resilience gap.”DANIEL KANIEWSKI,PH.D.Chair,NIBS Committee on Finance,Insurance,and Real Estate Multi-Hazard Mitigation CouncilManaging Director,Public Sector,Marsh McLennanvTo rethink how to use existing tools and approaches for managing flood risk,we developed three principles:Embrace current and forward-looking risk trends discerned through advanced analyticsHarness co-benefits by taking a systems-level approach to resilience(working with nature,for example)Coordinate the implementation of tools through new modes of collaboration1232023 State of Flood Report21POLITICAL PLAYS:EXTENDING THE NFIP LONG TERM WHILE ADDRESSING AFFORDABILITY AND REMOVING BARRIERS TO INNOVATIVE SOLUTIONSFlood risk is not a partisan issue;floods and the conditions that lead to them recognize no political affiliations.Fortunately,US legislators have proposed bipartisan flood insurance reforms that enhance flood risk protection and increased transparency.A longer-term NFIP extension would help stabilize the program.As mentioned earlier,its been in a state of short-term extensions since 2017.Risk Rating 2.0 is a new pricing methodology that FEMA rolled out beginning in 2021.The rating program is intended to make NFIP premiums more actuarially sound to better reflect the underlying flood risk and recognize loss mitigation efforts.One of the biggest issues is affordability.Currently,NFIP flood insurance premiums will increase up to 18ch year until they reach actuarially sound rates.This places financial burdens on many people and communities unable to relocate or pay the premiums.222023 State of Flood ReportNew approaches to financing flood risk for vulnerable populations,as well as new private flood insurance products,are possible.These include:Community-based Catastrophe InsuranceCBCI is disaster insurance arranged by a local governmental or quasi-governmental body or community group covering a group of properties within the community.There are two key features of CBCI:1.It is purchased or facilitated by some type of community entity 2.It covers multiple properties Beyond these two features,there can be enormous flexibility in the structure and design of CBCI.In most cases,it will make sense for CBCI to serve as a complement to traditional property insurance markets,potentially in the form of supplemental disaster protection.This could either provide small cash payouts to community members in the event of a disaster or offer full-limit,single-peril property protection in areas with high risk.In areas where the uptake of private insurance is low or protection gaps persist for other reasons,CBCI can offer the community a means to work with carriers or private capital providers to rebuild(and subsequently sustain)insurance uptake while facing loss volatility.Parametric InsuranceThis form of alternative risk transfer is becoming more widely used as a tool to improve climate resilience.Parametric insurance solutions use a third-party index to set predefined triggers,and the policy pays out once the agreed metrics are reached,regardless of the loss sustained.For example,a parametric flood insurance product could pay property owners when a threshold amount of rainfall is reached in a specified area and time period.An advantage to parametric insurance is the separation of the cover trigger from the cover beneficiaries it removes potential underwriting bias found for lower-income communities.1 Determine which groups could benefit Consider the needs and motivations for CBCI Identify residents needs and key risk exposures2345Define the needDetermine the authority to actEngage stakeholdersAnalyze riskTransfer risk Consider what entities have an interest in helping close the gap through CBCI Identify who has regulatory authority to implement a CBCI program Consider what policy reforms or institutional changes are necessary to enable various groups to make use of CBCI Engage community early in the process to inform all subsequent choices Communicate and educate community about the risk and mitigation options Capture data and modeling to design appropriate risk transfer structures and risk reduction mechanisms Understand the risk Set risk-based and means-based premiums associated with desired program structure Consider capital providers:reinsurers,insurers,NFIP,residual market mechanisms,captives Determine premium payment options including funding options for the purchase considering assessments and affordability Map options for disbursing claims paymentPotential Roadmap to Implementation 2023 State of Flood Report23Driving Toward ResilienceThe industry,led by Torrent and Marsh,is taking steps to close the protection gap,mitigate flood risk,and promote resilience.We see five core areas as priorities for achieving these goals:Long-term Authorization of the NFIPLegislation pending in Congress deserves support from the private sector to provide sustained funding of the NFIP as a key source of flood protection.Private Sector Engagement With Federal PolicymakersGiven their interest in the expansion of private flood options to provide more choice to policyholders,the insurance industry and businesses should make their case to members of Congress and executive branch officials.Flood Insurance Offered With Every Property and Casualty QuoteAgents can and should offer quotes on flood coverage for every new and renewal P&C insurance quote.Promotion of Resilient Construction and RebuildingProper design and thoughtful planning can promote flood resilience in the construction of new buildings as well as rebuilding following disasters.Increased Use of FEMA ProgramsDisaster assistance,such as the grants available from FEMA,can supplement flood insurance,whether from the NFIP or a private insurer.The insurance industry should encourage customers and communities to make use of this funding and other FEMA programs.This includes the relatively new Building Resilient Infrastructure and Communities(BRIC)grant program and other legacy hazard mitigation grant programs.These grant programs enable communities to invest in a variety of hazard mitigation projects,to include funding to remove or relocate buildings and infrastructure from floodplains.Such buyouts are an effective way to reduce the long-term costs of flood damage.For example,Charlotte-Mecklenburg County in North Carolina is using FEMA and non-federal funds to relocate about 700 families and businesses from local floodplains.This project began in 1999 and is expected to be completed by 2035.5RESISTANCE RECOVERABILITY =RESILIENCEFlood resilience is a combination of:1.Resistance:Measures that hold back water.2.Recoverability:Measures that minimize the impact and speed of recovery if water enters a building.2023 State of Flood Report24Torrent is hyper-focused on the following actions to help pave the way to resilience:EducateWe are driving awareness of the need for flood insurance as a significant part of the resiliency equation and are promoting the variety of options available in the marketplace to accompany the NFIP in the US.Make Flood Insurance EasierWe continue to advance our technology platforms to make it as easy as possible for agents,brokers,policyholders,and soon-to-be policyholders,to use.Evolving features that make our platform easier include automated population of data fields and Intuitive Compliance that generate more accurate quotes.Torrent is enhancing our service and simplifying the process to obtain flood coverage and handle claims.Make Flood Insurance More AccessibleAs part of the journey to make flood insurance easier,we are making it more accessible by joining forces with national entities to deliver a complementary array of flood insurance solutions.Increase OptionsWe are increasing the number of flood insurance products available through the Torrent platform.We are working collaboratively with our colleagues at Marsh and other Marsh McLennan businesses to make a positive difference through climate resilience strategies and solutions.Torrent and Marsh McLennan are building confidence and risk appetite with providers of risk capital to make private flood insurance more extensive and affordable,leading the way to flood resilience.Enhance the Customer ExperienceTorrent clients rely on us to provide peace of mind in the moments that matter.Torrent knows flood insurance is not just a technology venture its a people business.Were enhancing the customer experience through policyholder portals that allow claim status monitoring and exploration of direct-to-consumer options.We are working to make flood insurance more readily available,while delivering exceptional customer service,for an industry-leading experience.Torrent is committed to delivering technology,service,and products to agents,brokers,and consumers that make it as easy as possible to access flood insurance and to have a satisfying claims experience.As the leader in the flood insurance space,Torrent is part of the bigger picture of improving flood resilience,benefitting from the broad array of strategies and solutions being innovated by Marsh McLennan to transform the industry.ACTIONS TORRENT IS TAKINGMake Flood Insurance EasierIncrease OptionsEnhance the Customer ExperienceEducateMake Flood Insurance More Accessible2023 State of Flood Report252023 State of Flood Report26Direct and Indirect Drivers of Flood RiskDirect driversIndirect driversUrban developmentUrban sprawl in at-risk areas,impermeable surfaces,inadequate drainage networks,and aging flood defense infrastructureClimate change influences direct and indirect drivers and amplifies flood riskNature lossDeforestation and the degradation of ecosystems reducing natural flood defensesImproper agricultural practicesAlteration of soil structure and water retention capacityInterdependence with other perilsDrought,coastal erosion,wildfires and subsidence interacting with and worsening flood hazardExtreme rainfallStorm surges Sea level riseRiver overflow2023 State of Flood Report27Natural Catastrophes Feeding FloodTHE WAY FORWARD,TOGETHERAs a leader in addressing the worlds complex and increasingly interconnected dynamics around risk,strategy,and people,Marsh McLennan helps clients embed climate resilience strategies into every aspect of their businesses,from navigating the transition to a resilient,low-carbon economy to managing the physical risks associated with extreme weather events,including flood.Flooding is no longer a localized challenge,but a systemic,global threat.Flood risk is increasing at an alarming rate in many parts of the world.More frequent and severe floods pose an increasing,complex threat to society,economic activity,and the environment.Risk levels are amplified by climate change,nature loss,and the concentration of people and assets in flood-prone areas.Sea level rise is worsening the impact of storm surges in some coastal regions,while changing climate patterns are also increasing flooding outside traditional risk zones,for example,through record-breaking rainfall events.Global economic losses from floods increased from$504 billion in the 15 years between 1992 and 2006 to$729 billion between 2007 and 2021(in inflation-adjusted 2021 dollars),an increase of over 30%.The global population threatened by flooding is expected to rise from 18%now,to 36%in a 2C warming scenario,to 45%under a 3.5C warming scenario.Flood insurance protection gaps are growing in many parts of the world.Losses are leading to challenging renewals and insurers exiting markets.In many countries,flood insurance is not even available.Flooding creates significant social costs.Floods exacerbate inequalities,reverse development gains,and cause large-scale population displacements.With expected sea level rises these social costs could multiply,as up to 630 million people will live on land below projected annual flood levels by the end of this century.2023 State of Flood Report28TO ACCELERATE THE TRANSFORMATION OF FLOOD RISK MANAGEMENT,WE PRESENT THREE WAYS FORWARD.For each,we define the rationale and vision,outline the core components,and provide examples of implementation.In many locations,all three ways forward should be integrated into flood resilience strategies.1.Learning to Live With FloodsSociety must expect and prepare for flooding,with responses that enable a return to normal with minimal disruption after low-level,low-intensity floods.This means adapting to changing risk levels in a timely manner.Risk culture must balance fairness and individual responsibility.Risk data should be used effectively and knowledge translated into action.Community engagement initiatives should cultivate a culture of shared risk ownership,while innovative technologies link early warning to early action,and insurance solutions incentivize risk reduction.2.Building Strategic Protection Destructive,tail risk events still require protection,particularly for essential assets and locations where moving is not an option.In this instance,water is a design driver for urban development,while society increases investments in preserving ecosystems.We can design and build for resiliency.Funding comes through innovative financial mechanisms that monetize resilience for investors and provide attractive returns.Standardized frameworks help investors measure resilience,and resilience assessments from rating agencies steer private sector investments.New risk finance pools for communities provide insurance and resilience finance.Investments in data and technology support schemes such as resilience bonds,while risk reduction makes it possible to extend insurance coverage through solutions such as resilience-focused,public-private risk pools.3.Preparing for RelocationIn high-risk locations,it may not be feasible to accommodate floods or build protection.Planned relocations of people and assets can be both economically efficient and equitable.Here,risk assessments serve as the basis for action,and countries lay the foundations for relocations early with anticipatory governance and long-term funding arrangements.Communities are empowered to contribute to decisions on acceptable levels of risk,identifying priorities such as cultural preservation.Mechanisms to redirect resources from disaster relief to pre-emptive buyouts enable societies to avoid a pattern of cyclical destruction and rebuilding.In countries with space constraints,relocations take place across borders and are governed by international agreements.New financing and funding mechanisms based on long-term cost minimization and distributional fairness are deployed at scale.Bold steps from governments and the private sector are needed if society is to shift from a reactive to a proactive approach to flood resilience.Strong narratives about co-benefits are essential.Similarly,decision makers must be prepared to confront difficult trade-offs.SPEED Faster and simpler to settle than conventional insurance.Accelerate recovery and enhance resilience.COSTS Lower administrative and frictional costs.No claim adjustment process is typically required.FLEXIBILITY Any type of financial loss can be covered.Unrestricted use of payouts.These do not directly indemnify for damage,enabling organizations to invest in resilience or offset revenue impacts.COMPLEMENTARITY Can supplement traditional insurance policies by addressing their limits and exclusions.Provides coverage for types of risks that are difficult to insure through conventional policies.TRANSPARENCY Payouts and terms are clearly defined based on measurements of physical variables(e.g.,rainfall amount).Reduced disputes over coverage.ACCESSIBILITY Payouts and terms are clearly defined based on measurements of physical variables(e.g.,rainfall amount).Reduced disputes over coverage.Disadvantages include basis risk:The possibility that the payout mat not cover losses in full,or may exceed the damage sustained by the insured.Source:Marsh McLennanFeatures of Parametric Insurance Solutions2023 State of Flood Report29RESILIENCE SOLUTIONS FOR THE USDriving climate resilience initiatives with the Marsh McLennan Disaster Resilience Center of Excellence,Marsh McLennan and Torrent are paving the way for proactive engagement within the public and private sectors necessary for better US flood resiliency practices.Solutions are available.We see the way forward as a collaborative relationship between the public and private sectors.Recently,Julian Enoizi from Guy Carpenter shared during a Congressional flood insurance hearing insights on the five ways the public and private sector can work together to narrow the flood insurance protection gap.These include:1.Strengthen the NFIP2.Protect US taxpayers with reinsurance3.Grow the private flood market4.Reduce risk and embrace innovations,this includes designing and building for resilience along with parametrics5.Deliver new solutions such as community-based catastrophe insurance CBCI2023 State of Flood Report3030We can achieve these goals together and drastically shrink the US flood insurance gap for a more resilient country.As stated in the beginning of this report,the foundation for public and private collaboration is built on trust.This is the same foundation for any sustainable relationship between individuals,communities,organizations,and governments.In a world of automation and technology,relationships are still a cornerstone.This is the way forward to flood resilience and we invite you to join us on the journey.302023 State of Flood ReportTorrent Technologies is a business of Marsh,which along with Guy Carpenter,Mercer,and Oliver Wyman,are the primary businesses of Marsh McLennan.This document and any recommendations,analysis,or advice it contains(the“Analysis”)are not intended to advise you regarding any individual situation and should not be relied upon for that purpose.Torrents Analysis is based on sources we believe reliable,but we make no representation or warranty as to its accuracy.Torrent has no obligation to update this Analysis and shall have no liability to you or any other party arising out of this publication or its contents.Copyright 2023 Torrent Technologies,Inc.All rights reserved.84950ABOUT TORRENT TECHNOLOGIESTorrent Technologies,Inc.is a part of Marsh that leverages industryleading service and technology to improve the underwriting,distribution,and claims service of flood insurance.Since 2017,Torrent has been the National Flood Insurance Program(NFIP)Direct Service Provider.About 75%of Torrents Write Your Own(WYO)carrier clients utilize its full business process outsourcing capabilities,which include underwriting,claims,accounting,agency support,training,marketing,information technology,and mailing services.Integrated private primary flood and excess flood policies are offered along with the NFIP to provide agents and policyholders with a more seamless experience.A cloud-based,software as a service model enables clients to retain elements of flood insurance servicing.Torrent also offers integrated private primary and excess flood insurance for WYOs,their agents,and clients.ABOUT MARSHMarsh is the worlds leading insurance broker and risk advisor.With over 45,000 colleagues operating in 130 countries,Marsh serves commercial and individual clients with data-driven risk solutions and advisory services.Marsh is a business of Marsh McLennan(NYSE:MMC),the worlds leading professional services firm in the areas of risk,strategy and people.With annual revenue over$20 billion,Marsh McLennan helps clients navigate an increasingly dynamic and complex environment through four market-leading businesses:Marsh,Guy Carpenter,Mercer and Oliver Wyman.For more information,visit ,and follow us on LinkedIn and Twitter.
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