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April 02, 2003
PepsiCo Shareowners Will Address the Business Risks of Water Scarcity
by William Baue
The SEC is requiring PepsiCo's to allow its shareowners to vote on a resolution regarding the
business risks of water scarcity.
SocialFunds.com --
"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. In its 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 avoid burdening municipal wastewater treatment systems and reduce our use of water,"
PepsiCo's Environmental Commitment report states.
In his letter urging the SEC to require
PepsiCo to include the 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 conservation efforts."
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 letter stated.
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
risk.
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 PepsiCo's arguments,"
Steve Lippman, Trillium's Senior Social Research Analyst, told SocialFunds.com.
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, margins will get squeezed," Ms. Abbey
concluded.
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SRI World Group, Inc. All Rights Reserved.
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