PepsiCo Shareowners Will Address
the Business Risks of Water Scarcity
"There are two wars going on now: a war in Iraq
and another one against the tremendous plight of humans
lacking water," said Michel Camdessus, former managing
director of the International Monetary Fund (IMF), at
the 3rd World Water Forum in Kyoto, Japan late last month.
"It is the war against water scarcity that will increase
and take on dramatic proportions very soon."
Indeed, battles were pitched before his eyes while he
presented a report entitled Financing Water For All, which
supported water privatization, as protesters unfurled
banners reading "No Profits from Water" onstage.
Concern about water supplies is seeping to investors
who own stock in
companies that use large amounts of water. A group of
PepsiCo (ticker: PEP) shareowners have filed a resolution
asking the company to report on the business risk of water
use throughout its supply chain. The resolution also asks
the company to disclose its "current policies and
procedures for mitigating the impact of operations on
local communities in areas of water scarcity."
"Water is going to be one of the most important
environmental issues of the 21st century," said Deb
Abbey, CEO and portfolio manager of Vancouver-based Real
Assets Investment Management, which co-filed the resolution
with Boston-based Trillium Asset Management. "Pepsi
has to adjust to this new reality."
PepsiCo counters that it is already making this adjustment.
letter to the Securities and Exchange Commission (SEC)
requesting permission to omit the resolution from its
proxy, the company contended that its November 2002 Environmental
Commitment report "substantially implemented"
the resolution's requests.
"Pepsi-Cola plants are increasingly designed to
municipal wastewater treatment systems and reduce our
use of water," PepsiCo's Environmental Commitment
In his letter urging the SEC to require PepsiCo to include
resolution in its proxy, Real Assets Vice President of
Social Research Kai Alderson pointed out that such statements
"are vaguely worded and unverifiable." Mr. Alderson
characterized PepsiCo's Environmental Commitment report
as containing "anecdotal information on ad hoc water
The PepsiCo report contains a "Water Quality/Water
Use" section for the Pepsi Cola, Tropicana, Gatorade,
Frito Lay, and Quaker Oats divisions, each of which had
between one and nine bullet points with general information
and specific examples.
"But there is no evidence [in the report] to suggest
that these ad hoc
initiatives have been undertaken in the context of a corporate-level
strategy, that concrete goals have been set, or that performance
measurement and management systems are in place to assure
shareholders that these goals are being achieved,"
wrote Mr. Alderson.
Mr. Alderson's letter compared PepsiCo's commitment to
addressing the impending water scarcity crisis with that
of the Coca-Cola Company (KO), where Real Assets voluntarily
withdrew a similar resolution.
"Coca-Cola has not only conveyed to the [resolution
filers] a deep
understanding of its challenges relating to water, but
has also signaled
its commitment to addressing this emerging business risk
by sharing with the [resolution filers] plans, training
materials, and internal operational targets," the
Coca-Cola also shared its plans to release a report later
this year that addresses the very issues requested by
the resolution: water-related
business risks as well as policies and practices to mitigate
The issue boiled down to whether PepsiCo's Environmental
Commitment report amounts to full disclosure, as the company
maintained, or "superficial" disclosure, as
the resolution filers asserted.
"The SEC sided with us, and did not concur with
Steve Lippman, Trillium's Senior Social Research Analyst,
Accordingly, PepsiCo has included the resolution on its
proxy statement, along with a response from the company
that cites several examples of water use reduction.
Ms. Abbey of Real Assets pointed out that the business
risks of water
scarcity are not an isolated issue.
"Although soft drinks companies face the biggest
brand risk, they're not
the only ones who have to deal with the water issue,"
said Ms. Abbey. "One way or another, increasing water
scarcity is going to lead to higher prices for everyone,
from manufacturers to mining firms."
"Unless companies begin to address this issue strategically,
will get squeezed," Ms. Abbey concluded.