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April 28, 2009

PepsiCo Agrees to Policy Respecting Human Right to Water
    by Robert Kropp

Shareowner advocates led by NorthStar Asset Management succeed in engagement with PepsiCo on resolution calling for adoption of water management policy. -- Current global water management practices are not sustainable, according to the CEO Water Mandate, a public-private initiative launched in 2007 by the UN Global Compact . Companies, especially those whose water usage is considerable, have a responsibility to make water resource management a priority.

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Prospectus Ordering CenterYet the CEO Water Mandate is "voluntary and aspirational," and falls short of mandating that its signatory companies adopt specific policies and procedures addressing water management resources that endorse the United Nations' policy on the Human Right to Water. In 2002, the United Nations defined the Human Right to Water as "all people's right to safe, sufficient, acceptable, physically accessible and affordable water for personal and domestic use."

Julie Goodridge, founder of NorthStar Asset Management, a Boston-based investment management firm, told, "If you read the CEO Water Mandate, it doesnít directly address community impact." So when NorthStar found itself with shares of PepsiCo in its portfolio, a staff member urged Goodridge to submit a shareowner proposal directing PepsiCo to create a policy articulating its commitment to the Human Right to Water.

In 2003, PepsiCo's water-use license was revoked in Pudussery, India, because of claims that its bottling plants there were over-consuming and depleting community groundwater, which is a direct violation of the Human Right to Water. Goodridge said, "The community of Pudussery found that their well was dry, and had to raise a big stink before the local government addressed it. PepsiCo came in with a lot of scientists to try to prove that it was not responsible for the groundwater depletion."

The shareowner resolution, crafted with the help of water justice experts at the Unitarian Universalist Service Committee (UUSC), an international human rights organization, was submitted for the 2008 proxy season. PepsiCo challenged the resolution at the US Security and Exchange Commission (SEC), claiming that the proposal was vague and ambiguous, and contained charges of illegal or immoral conduct without proof.

The SEC disallowed PepsiCo's challenge to the resolution, and the resolution went on to gain 7% of shareowners' votes, easily exceeding the threshold of 3% that is required by the SEC for a shareowner proposal to be re-submitted for a second year.

Goodridge said, "When we prepared to submit the proposal for the 2009 proxy season, Lauren Compere at Boston Common got in touch with us, and they co-filed the resolution." Compere is the Director of Shareholder Advocacy at Boston Common Asset Management.

Goodridge continued, "We've had success with shareholder resolutions dealing with human rights in the workplace, but I always thought of them as black-and-white issues, as no-brainers. The issue of water rights is much more complex."

"We're a money management firm, not water activists," said Goodridge. "It's hard for an office with four people managing portfolios to take on corporate giants. Lauren has had much more experience with this kind of action than we have."

The PepsiCo resolution was re-filed in November, 2008. In December, PepsiCo contacted NorthStar and asked for an example of the kind of policy the investment firm would like to see it adopt.

"I had to craft a water policy document for a major corporation," Goodridge said. "I sat down and in fifteen minutes wrote a policy. PepsiCo got back to me and said that they thought this was something they could work with."

Negotiations continued through the winter. According to Goodridge, her original statements were much stronger than the language eventually agreed upon, but did achieve a starting point. In March, NorthStar announced that PepsiCo had agreed to adopt an official policy in support of the human right to water. PepsiCo is the first publicly traded, multinational corporation to create such a policy.

In its Guidelines in Support of the Human Right to Water, PepsiCo agreed to steps to ensure that its global business engagement respects that right. The company agreed to ensure that its activities preserve the quality of the water resources in the communities in which it operates, do not diminish the availability of community water resources, and do not adversely impact accessibility of community members to water resources.

PepsiCo also agreed to involve communities in its plans to develop water resources, and to advocate that safe water supplies should be available to members of the community.

"This is our first attempt at a resolution this complex, and it is a huge victory," said Goodridge. "The PepsiCo agreement goes way beyond the CEO Water Mandate, and puts a policy into place that requires engagement with the community."

Referring to the give-and-take of the negotiations, Goodridge continued, "I really hate to be middle of the road, because I consider myself to be a radical. But this is step one in a process. If we find that PepsiCo hasnít lived up to its promises, we will re-file the resolution next year."

PepsiCo is not the only major corporation targeted by NorthStar in its shareowner advocacy campaign this year. The firm also filed a resolution with Intel, whose challenge on the grounds that the proposal was duplicative of the company's existing policies was disallowed by the SEC.

Intel reported that it used 7.5 billion gallons of water in 2007. And while the company is recognized as a leader in water reclamation programs, it operates in countries that enforce the Human Right to Water. Therefore, it is likely that Intel's water usage and respect for local communities will remain under scrutiny.

Arguing that "Global corporations operating without strong human rights and environmental policies face serious risks to their reputation and share value," the resolution requests that Intel create a policy articulating its commitment to the Human Right to Water.

"Intel challenged our resolution in a big way," said Goodridge. "But if we can get the resolution passed, it would be an enormous step."

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