The Climate Change Concern for PepsiCo

The Climate Change Concern for PepsiCo

 Climate change will have a negative impact on PepsiCo’s value chain in two large ways: the impact of higher temperatures and flooding on agricultural yield and a dwindling fresh water supply.

First, climate change poses a direct danger to the availability and costs of agricultural raw materials. PepsiCo relies heavily on raw agricultural materials for their products. Through increasing temperatures, droughts, and extreme flooding, studies from the EPA that climate change harm the quantity, quality and cost of agricultural crops and the global food supply at large[1].

PepsiCo should be alarmed by these prospects as their supply chain is so dependent on the availability, and prices of the agricultural market.

Second, climate change is posing a significant threat to the global supply of fresh water – a key component of PepsiCo’s supply chain. A report from the Intergovernmental Panel on Climate Change stated that increasing temperatures from climate change will lead to intense water scarcities throughout the world[2]. In 2016 alone, the costs to businesses of conditions such as droughts, water scarcity, and pollutions was $14 billion, an 81% increase from 2015[3].

This is troubling for PepsiCo because fresh water is not only a key ingredient for their beverages, but also because many of the areas affected are strong agricultural suppliers for PepsiCo. These suppliers rely heavily upon a clean water supply. In fact, 70% of all the world’s fresh water is used by the agricultural industry.

PepsiCo’s Addresses The Concern

 PepsiCo has announced plans to address the climate change issues affecting their supply chain by focusing on two big areas: Greenhouse gas emissions (GHG), and increased water efficiencies

GHG Emission Reduction

 In May 2017, PepsiCo announced its vision for GHG reduction as part of its Performance with Purpose[4] initiative. The plan lays out steps for achieving a 20% reduction in GHG emissions across the PepsiCo value chain over the next decade. PepsiCo focuses its efforts on reducing Scopes 1, 2, and 3 emissions across its supply chain.[1].

 Scopes 1 and 2 Emissions

Scopes 1 and 2 emissions include on-site energy generation, fleet fuel, and purchased electricity. PepsiCo plans to reduce their Scope 1 emissions in the following ways[5]:

  • Improvements to energy efficiency through their Resource Conservation (ReCon) program. This is a global comprehensive platform of tools and resources to improve energy, water and waste efficiencies in their manufacturing processes.
  • Increased use of on-site renewable energy. The firm is in the process of transferring the energy supply of many of their plants to renewable sources.
  • Improvements in fleet efficiency. The firm has already transferred many of their fleet vehicles to full-electric (EVs) or Compressed Natural Gas (CNG), which emits far fewer GHG tailpipe emissions than a traditional diesel freight truck. The company will continue these efforts over the next ten years.

Scope 3 Emissions

PepsiCo’s greatest opportunity for GHG reductions is in Scope 3 emissions – which currently account for 92% of the firm’s entire carbon footprint. For PepsiCo, these emissions come primarily from operations in farming, packaging, manufacturing and third-party transportation. The firm plans to reduce Scope 3 emissions by:

  • Improving vendor and cooler efficiencies
  • Developing alternative packaging materials,
  • Increasing recycled content in packaging materials.
  • Incorporating environmentally-conscious design into product development process[6].

Water Usage
PepsiCo was able to reduce its operational water use per unit of production by 26% in 2015 compared to 2006. This saved the firm more than $80 million during 2011 – 2015[7]. The firm plans to continue these efforts by increasing the water efficiency in their operations and partnering with farmers and governments to better replenish local watersheds.

At large PepsiCo claims that its broader environmental sustainability agenda has delivered to the firm more than $600 million in cost savings over the past five years[8]. These continued efforts over the next 2 – 10 years will assist the firm in adapting to the circumstances and capturing significant value.

Other Steps for PepsiCo to Take

 In addition to the steps already being taken, I would recommend that PepsiCo work to improve the communication systems across all stakeholders in their supply chain. We know that better communication and information flows will allow supply chain stakeholders to be more efficient across the whole chain. If PepsiCo can integrate communication systems that allow their processing plants to be in sync with their agricultural and water suppliers for instance, then the firm would have a better sense of climate conditions and be able to better prepare.

A lasting question for me is in what ways will an increase in flooding affect PepsiCo’s ability to efficiently transport goods throughout its supply chain?

[1]According to the Greenhouse Gas Protocol, scope 1 emissions are ones that occur directly from the firm’s plants and operations, scope 2 emissions occur from the firm’s consumption of purchased electricity, heat or steam, and scope 3 emissions are an indirect result from activities in the firm’s supply chain such as transportation activities, the extraction of raw materials and fuels, and waste disposal

Sources:

[1] Climate Impacts on Agriculture and Food Supply. The U.S. Environmental Protection Agency. https://19january2017snapshot.epa.gov/climate-impacts/climate-impacts-agriculture-and-food-supply_.html#crops

 

[2] Climate Change and Water, Intergovernmental Panel on Climate Change. http://www.ipcc.ch/pdf/technical-papers/climate-change-water-en.pdf

 

[3] The Guardian: PepsiCo Takes on Coca-Cola with Latin American Water Plan, Alison Moodie: https://www.theguardian.com/sustainable-business/2016/dec/22/pepsico-challenges-coca-cola-with-latin-america-water-plan

 

[4] Performance With Purpose. Pepsico.com http://www.pepsico.com/sustainability/Performance-with-Purpose

 

[5]PepsiCo Report on Climate Change: https://www.pepsico.com/sustainability/climate-change?gclid=CjwKCAiAxarQBRAmEiwA6YcGKHNc2hp-miLM3HYJQ_u9OiiiuIwW5-MPhzjf0TkEfM-mq8O3BwiqahoCGwYQAvD_BwE

 

[6] PepsiCo Report on Climate Change: https://www.pepsico.com/sustainability/climate-change?gclid=CjwKCAiAxarQBRAmEiwA6YcGKHNc2hp-miLM3HYJQ_u9OiiiuIwW5-MPhzjf0TkEfM-mq8O3BwiqahoCGwYQAvD_BwE

 

[7] PepsiCo Exceeds Global Water Stewardship Goals. PepsiCo.com. https://www.theguardian.com/sustainable-business/2016/dec/22/pepsico-challenges-coca-cola-with-latin-america-water-plan

 

[8] PepsiCo Exceeds Global Water Stewardship Goals. PepsiCo.com https://www.theguardian.com/sustainable-business/2016/dec/22/pepsico-challenges-coca-cola-with-latin-america-water-plan

 

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11 thoughts on “The Climate Change Concern for PepsiCo

  1. This article raises an interesting conundrum facing all consumer packaged goods companies, especially those reliant on agricultural inputs such as PepsiCo. I really like the idea of increasing commutation across the supply chain, given that each party likely has its own sustainability concerns and is thinking about the same problems Pepsi is facing. But as mentioned, they would be better off to think about sustainability as a collective whole, rather than each party take action in a vacuum.
    I also wonder about the role of the consumer and the general public in this landscape, given that Pepsi ultimately cares about what the consumer wants. On the one hand, consumers have the opportunity to put immense pressure on PepsiCo to take bold strides to improve sustainability in their supply chain. However, does the average PepsiCo consumer care about sustainability? Or are low prices a much greater concern? If asked to pay 20% for a bottle of soda made from recycled packaging, would the average Pepsi consumer make that choice? My guess is that this will require collective action by Pepsi alongside its major competitors to make these sorts of changes industry-wide, and that consumers who do care about sustainability can help put the public pressure on PepsiCo to ensure this happens.

  2. It’s always interesting to hear how incredibly large multinational companies are thinking about their impact on the planet – and it’s refreshing to know that Pepsi not only acknowledges the looming problems, but also is looking to address how they can help. That said, I’m curious if you looked into how Pepsi is thinking about not only helping to mitigate their contribution to global warming but also how they’re going to accommodate the inevitable impact of a warming planet on their supply chain.

    Could Pepsi help their suppliers become less water dependent by investing in infrastructure that would make their supplier’s crops less water dependent (and thus less affected by the pending effects of climate change)? Perhaps desalination, robust rain water collection systems, or heat protection to prevent evaporation could help. I would think that Pepsi’s enormity could help to integrate these measures at scale far more easily than any of their individual suppliers could independently. Alternatively, I wonder if Pepsi has considered alternative production locations by either helping to relocate their existing suppliers or switching to different suppliers in locations less likely to face drought conditions. Assuming that Pepsi relies on a variety of crops, perhaps merely helping their suppliers to shuffle the crops they’re growing could help – albeit this would require tremendous amount of trust and coordination!

    With an eye toward long-term solutions – and perhaps on a more slightly more controversial note given that multinational brands often face profound backlash when they change their recipes or offerings – I’m curious if it’s time Pepsi head back to the drawing board to reconsider their product mix (or at least those in the pipeline) so as to rely on fewer water- and energy-dependent resources. Given the current backlash on soda (in the developing world, anyway!), it seems like it’s as good of a time as any for Pepsi to seriously reconsider how they’ll feed and hydrate us in the future.

    On a less planet-centered note, I wonder if Pepsi has considered how they will absorb or pass on additional costs associated with both the limited availability and raising costs of agricultural raw materials. Have they looked into negotiating with suppliers today in order to both lock in prices and ensure first access to crops? Do they have the margins to be able to absorb these price hikes? Or are we meant to pay more for a Pepsi in the future?

    It will be interesting to see how this all plays out!

  3. Nick – great article! Your piece raised a lot of questions for me about how Pepsi will be able to efficiently implement their desired climate change and water conservation measures. While the measures should have long term cost savings, they require significant investments in the short term, and PepsiCo is reliant upon actions by external parties in their supply chain if PepsiCo wishes to reach its end goals. To reduce the scope 3 emissions, how much leverage does PepsiCo have to force other parties to adopt greener policies? Will PepsiCo have to sacrifice financial terms in exchange for the environmental policies they want?

    Your thoughts on increased communication going forward made me wonder about potential partnerships with companies at the forefront of developing practical uses of IOT. Should PepsiCo be learning from/working with companies like GE or IBM to make sure the various parts of its supply chain are talking to each other?

  4. Great overview of Pepsi’s challenges and efforts in combating climate change. You mention that Pepsi is looking at reducing emissions throughout its entire supply chain. I wonder how this effects suppliers, immediate, secondary, tertiary, etc. A quick read of their Supplier Guidelines for Sustainable Agriculture [1] lays out many qualitative guidelines but no specific or quantitative mandates for their suppliers to meet certain thresholds. All of the goals you have laid out for them to hit their emissions targets are great, but how do they actually go about doing that? How do they ensure that their suppliers are doing enough to have a true impact?

    I think companies as global and large as Pepsi have a responsibility to not only set goals, but to change the ambiguity that often comes with climate change and sustainability efforts (particularly true in Food & Beverage). They should be working with suppliers globally to ensure there are numeric KPI’s set and enforced.

    The challenge for such a global company is complying with local regulatory environments (and potentially local competitive environments where competitors may not be as focused on sustainability). Not only should Pepsi be setting a precedent with their own operations, they should be doing everything they can to enable their suppliers to do the same. They must set and enforce metrics and use their size and influence to create localities where suppliers can be reasonably held to extremely high standards. Only doing this for their internal operations is not enough.

    Slightly unrelated, but as Pepsi is extremely focused on agriculture sustainability, I wonder how they think about their influence and responsibility in GMO research and efforts to feed a growing population? It would be interesting to see how they are contributing to global sustainability outside of climate change.

    1. “PepsiCo Global Sustainable Agriculture Policy.” PepsiCo, Oct. 2016, http://www.pepsico.com/docs/album/
    policies-doc/pepsico-sustainable-agriculture-policy.pdf. Accessed 29 Nov. 2017.

  5. I agree with the author’s underlying argument that projected declines in agricultural yield and fresh water supply represent a significant threat to PepsiCo. These expected climate changes will drive up costs across the supply chain for Pepsi and the entire beverage industry.

    However, a couple of key questions for me remain. How much time does PepsiCo have to effectively respond to these threats before they substantially increase costs? If these are longer term threats, Pepsi could focus today on projects that immediately improve efficiency and decrease costs while putting other projects that have more of an environmental impact but less of an economic impact on the back burner.

    Additionally, it currently appears that Pepsi’s sustainability program benefits both shareholders and society at large. But, when shareholders’ interests conflict with environmental and societal interests, who should Pepsi prioritize? I believe shareholders will receive priority, and, if that happens, regulators will be required to further protect society’s interests.

  6. Nick, very interesting read. And I was very encouraged by the measures which would be found in the center or the “save the world” / “increase profit” Venn Diagram. Surely those initiatives would both drive a positive externality (or less of a negative one) while positioning Pepsi for improved financial performance. Whenever we can reduce input use while keeping conversion costs steady, that sounds like a home run. Saving $80M on water costs? Sign me up!

    That said, I would respectfully disagree that climate change is necessarily a bad thing for Pepsi, so I think maybe Pepsi should be judicious for measures that don’t have a bottom-line impact. Could longer growing seasons drive higher throughput for Frito Lay’s suppliers’ corn fields? Could hotter weather drive more demand for ice-cold cola (seriously)? If water costs are higher, wouldn’t the pricing of the whole range of substitute beverages move in chalk-step? If these sorts of things are true, then perhaps there should be more of a central regulatory role in deciding corresponding requirements (which would also cement competitor response, securing larger results and avoiding competitor outperformance through freeloading).

  7. It seems like all the strategies that Pepsi is employing are in mitigation of inevitable downsides of climate change but keeping their business model status quo all the while. Are there opportunities to start rethinking the business on a more holistic level. For example, someone above mentioned desalination which is still cost prohibitive, but what about other opportunities like non-water based drinks, using chemicals instead of agricultural products to flavor their beverages, or investing in vertical gardens as a way to source. I would encourage companies like Pepsi to see climate change not just as an externality to mitigate, but as an opportunity to rethink their business models for the 21st century.

  8. ABW makes a good point above regarding the short-term vs. long-term implications of PepsiCo’s strategy. I’d like to dig a bit deeper in PepsiCo’s ability to meet the short-term priorities of current shareholders, while optimizing for the longer term. I believe part of the answer is about the quantum of investment today – they can likely invest a modest amount and satiate investors, but more than that may be difficult.

  9. Great article, Nick.
    Climate change clearly offers a long-term thread to PepsiCo, but am wondering to which extend PepsiCo is willing to invest in the short term to offset this threat, and/or whether shareholders are willing to pay for this.
    Currently Pepsico is focusing on making its own operations more environmental friendly. I believe that Pepsico also has a major responsibility to change the mindset of its stakeholders (suppliers, consumers, etc.) and to make its entire eco-system environmental friendly.

  10. Nick – great write up. Given that Scope 3 emissions represent the bulk of PepsiCo’s carbon footprint and the success of the firm’s plans to reduce emissions of this type depends on external stakeholders, what are some of the things that PepsiCo is doing to ensure the buy-in of external stakeholders?

    I think that the savings on water usage are phenomenal. From a societal standpoint, it would be great if PepsiCo shared the strategy that it took to achieve this. However, given the high degree of competition in the industry, I don’t think PepsiCo’s leadership team would agree to do this.

  11. Thanks for the article Nick, very interesting. Scope 3 emissions account for 92% of the firm’s entire carbon footprint. It strikes me that Pepsico’s action plan in this area is lacking and vague (1. Improving vendor and cooler efficiencies, 2. Developing alternative packaging materials, 3. Increasing recycled content in packaging materials, 4. Incorporating environmentally-conscious design into product development process). Pepsico should use its position on the Climate Leadership Council [1] following through with its proposed new carbon tax [2] and implementing a systematic outreach plan with each of part of its external supply chain in order to push best practices so as to reduce those firms’ carbon footprints.

    [1] Climate Leadership Council: https://www.clcouncil.org/mission/
    [2] The Energy 202: Exxon, GM and Pepsi plan to back carbon tax floated by ex-GOP officials: https://www.washingtonpost.com/news/powerpost/paloma/the-energy-202/2017/06/20/the-energy-202-exxon-gm-and-pepsi-plan-to-back-carbon-tax-floated-by-ex-gop-officials/5947e0eae9b69b2fb981dd82/?utm_term=.68ee5a1e6c3e

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