Coca-Cola: Keep Your Soda Cold (Sustainably)

Coca-Cola, the largest beverage company in the world, has launched a sustainability program that it hopes will reduce its carbon footprint though 2020. Through a series of investments including moving away from damaging coolants and increasing the number of fuel efficient vehicles in its distribution network, Coca-Cola is poised to deliver on their goals and become a more sustainable company.

Refrigeration is Coca-Cola’s largest source of carbon emissions

Depletion of the earth’s ozone layer and increases in surface temperatures have been a known problem for decades [1]. Five years before the initial framework for the now famous Kyoto Protocol was drafted, the Montreal Protocol was ratified with the goal of phasing out chlorofluorocarbsons (CFCs). While the CFC replacements, hydrochlorofluorocarbons (HCFCs) and then hydrofluorocarbons (HFCs), were not as damaging to the earth’s ozone layer, these compounds still did a great job at trapping heat. So while holes in the ozone layer were not necessarily widening, earth’s surface temperature was still increasing. Two weeks ago, on 15 October 2016, the Montreal Protocol was amended to now phase out HFCs by 2100 [2].

This recent amendment bodes well for Coca-Cola as it reinforces a corporate goal made in 2005 to move to HFC-free refrigeration equipment by 2015 [3]. By mid-2015, though, Coca-Cola realized that it would not be able to meet its ambitious goal and was forced to revise its target year to 2020. The commitment Coca-Cola has put behind this initiative is impressive having already invested more than $100 million over the last ten years to improve the environmental impact of its coolers. Instead of HFCs, the company now uses CO₂ based coolants which has a global warming potential 1,430 times lower than HFCs [4]. Why invest so much money in coolers? Because refrigeration is the largest source of Coca-Cola’s carbon emissions footprint [5].

Refrigeration isn’t the only source of emissions

While Coca-Cola has already begun addressing cooling as a means of reducing its carbon footprint, there are still other parts of the value chain that could use emissions optimization. Coca-Cola manages a network of company-owned, company-controlled, and independent distributors to move product around the globe [6]. This delivery fleet contributes 4% of Coca-Colas carbon emissions which in 2014 equated to 3.7 million metric tons of greenhouse gasses. Coca-Cola’s total emissions of 92.5 million metric tons of CO₂ puts the company slightly above Israel’s entire 2010 CO₂ equivalent emissions [7]. To combat these pollutants, Coca-Cola has and will need to continue to add fuel-efficient vehicles to its distribution process [8].

Preservation of natural resources is essential to long-term sustainability

As the largest beverage company in the world, commodities such as sugarcane, citrus, tea, and water are essential inputs to Coca-Cola’s products. Ensuring a stable, adequate supply of these core components is essential to the long-term success of the company. But as climates change and surface temperatures increase, there is the threat of intensification of weather patterns which can potentially cause large swings in seasonal weather [9]. Events such as floods and draughts could adversely affect crop yields which could in turn cause revenues to decrease (smaller production runs) or raw material costs to increase. Regardless of the direction, large fluctuations, both inter- and intra-season could affect the profitability of Coca-Cola.

To mitigate the effects of variation in commodity yields, Coca-Cola should (and I would be surprised if it did not do this already) purchase futures contracts on the commodities it relies on most. Doing so will allow the company to somewhat dampen the effects of volatile crop yields. In turn, this insurance is an added expense that will also affect Coca-Cola’s profitability. Not controlling raw material costs regardless of climate change would be incredibly irresponsible. But as the population grows, pollution increases, and natural resources become more scarce, it is arguably more important than ever to hedge input pricing risk with futures.

The future of Coca-Cola

On a daily basis, 3.25% of global beverage consumption is some form of Coca-Cola product [6]. To produce enough volume to satisfy the global need requires immense material sourcing, manufacturing, and distribution resources. When operating at this scale, Coca-Cola needs to continue keeping sustainability top-of-mind and to strive towards the sustainability goals that it revised for itself in 2015. If the company can continue reducing carbon emissions and hedging its risk on raw material price spikes, it will continue to be the successful company it has been for the last 130 years.

(736 Words)

 

References

[1]          MSLJ, “Why world leaders are meeting to discuss hydrofluorocarbons,” The Economist, 9 October 2016.

[2]          J. Tollefson, “Nations agree to ban refrigerants that worsen climate change,” Nature, 15 October 2016.

[3]          “Coca-Cola 2014/2015 Sustainability Report,” 2015. [Online]. Available: https://www.coca-colacompany.com/content/dam/journey/us/en/private/fileassets/pdf/2015/07/2014-2015-sustainability-report.15_080415.pdf. [Accessed 4 November 2016].

[4]          P. Forster and V. Ramaswamy, “Changes in Atmospheric Constituents and in Radiative Forcing,” in Climate Change 2007, New York, Cambridge University Press, 2007.

[5]          Staff, “Cooling Equipment: Pushing Forward with HFC-Free,” Coca-Cola, 20 September 2016. [Online]. Available: http://www.coca-colacompany.com/cooling-equipment-pushing-forward-with-hfc-free. [Accessed 3 November 2016].

[6]          Coca-Cola, “2015 Form 10-K,” 2015.

[7]          “Climate Analysis Indicators Tool (CAIT) Version 2.0,” World Resources Institute, Washington, DC.

[8]          Staff, “An Ambitious Goal: Reducing Carbon in Our Value Chain,” Coca-Cola, 20 September 2016. [Online]. Available: http://www.coca-colacompany.com/an-ambitious-new-goal-reducing-carbon-in-our-value-chain. [Accessed 3 November 2016].

[9]          “Is it global warming or just the weather?,” The Economist, p. 2015, 9 May 2015.