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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.


"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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