Climate Change Threatens Company, Shareholders, and Consumers
Extreme weather seems to be the norm these days. From Hurricane Harvey’s devastation in Texas to the Western Wildfires that have destroyed much of California’s wine country, many people are pointing fingers at climate change.
While counterintuitive, climate change is leading to more intense rainfall and more intense drought…just not in the same place. This effect is leading to lower crop yields, scarcity of water, and many other consequences .
For PepsiCo, climate change threatens its ability to deliver on both consumer demand and shareholder value. Extreme weather can strain PepsiCo’s value chain by hindering its ability to move product from production to the consumer, ultimately leading to either out of stocks or increased prices for the consumer. Declining crop yields can impact raw material prices, leading to higher internal costs . And on top of direct business impacts, PepsiCo faces reputational risk, as company policies become more and more important for consumer purchasing decisions, regulatory relationships, and future talent acquisitions . So while climate change initiatives require upfront investments, these investments likely minimize risks for the company, shareholders, and consumers in the end.
Performing with Purpose
PepsiCo publicly acknowledged “business success is inextricably linked to the sustainability of the world we share” back in 2006 with the development of the Performance with Purpose (PwP) mission. The mission aims to improve sustainability in several aspects of the world, including the environment . And since 2006, PepsiCo has already achieved some progress in environmental sustainability, such as reducing its operational water use by 23% and increasing energy efficiency of legacy operations by 16% from its 2006 baseline . These initiatives have also proved profitable: the company has saved +$600 million from its environmental sustainability projects since 2011 . But it also recognizes that it must continue to invest in new solutions to reduce emissions and cut back on water usage, which is why it announced a new 2025 environmental agenda at the end of 2015.
In the short term, PepsiCo plans to leverage existing learnings to slowly reduce its internal dependence on water and greenhouse gasses. Specifically, one of its new goals is to build on the existing improvement in water-use efficiency with an additional 25% improvement . Technology such as waterless rinsing systems to clean bottles will likely be leveraged globally to achieve this goal . In addition, it is looking to continue to reduce absolute greenhouse gas emissions by at least 20% in its legacy operations through further expansion of electric-powered fleet and on-site energy generation, an effort that has already been in progress prior to 2015 .
However, PepsiCo’s direct carbon footprint only represents 7% of its total value chain. Over the next 10 years, management looks to work with suppliers, partners, and customers to impact the remaining 93% of PepsiCo’s carbon footprint that occurs outside of its direct operations . In particular, agriculture and packaging have the two largest carbon footprints in the value chain . Management has stated that it looks to help these two sectors reduce emissions through the expansion of the PepsiCo Sustainable Farming Initiative and implementing sustainable packaging materials . However, it is unclear the impact that these actions will have on emissions right now.
More to Do
PepsiCo arguably is leading the pack in Food and Beverage on environmental sustainability with its progress thus far. But there is more to do. In the short term, it should be cognizant of the stress that this change can have on the organization. Setting too lofty ambitions year after year can disillusion the frontline and ultimately lead to failure. In addition, it should also be more clear on how it aims to work with partners on reducing their carbon footprint in the value chain. Ultimately, climate change initiatives should be viewed as a marathon, not a sprint.
Over the next 10 years, management should also begin to consider how it can impact the global environment outside of its direct value chain. It is creating technology and learnings that can be lifted and shifted to other competitors and industries, so it should strive to be a center of excellence and develop ways for easy dissemination of information and learnings to improve the broader environment as well.
A key question that remains, however, is how the consumer plays into PepsiCo’s environmental initiatives. While many of its initiatives have never had a direct impact on the end consumer, the action to consider sustainable packaging will surely impact a consumer’s experience. Are consumer-facing initiatives necessary? If so, are consumers truly ready for this type of initiative?
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