On November 4th, I interviewed Jim Andrew, the Chief Sustainability Officer at PepsiCo, about their environmental, social, and governance (ESG) program. PepsiCo is a very big company, the second largest food and beverage company in the world. PepsiCo generated $79 billion in net revenue in 2021, with 23 food and beverage brands that generate more than $1 billion each in retail sales. Those brands include Pepsi, of course, but also Lay’s, Quaker, Doritos, Cheetos, and Gatorade.
Because of the food giant’s size, their sustainability strategy also is very broad. The focus of my interview with Mr. Andrew was the company’s efforts to reduce greenhouse gas (GHG) emissions across their end-to-end value chain. The multinational’s goal is to achieve net zero GHG emissions across their value chain by 2040.
PepsiCo’s Internal Supply Chain
PepsiCo has an enormous and complex supply chain. 294 manufacturing facilities produced more than 90 million metric tons of food and beverage in 2021. The products are then sold in over 200 markets and territories. PepsiCo products then reach shelves through its operating subsidiaries and a complex network of fleet operations. Their distribution approach varies country-to-country. But in North America, distribution is predominately through their company-owned fleet. In 2021, their company owned fleet traveled about 1.2 billion miles bringing their products to customers. In 2021, the company-owned fleet accounted for nearly 30% of their global Scope 1 and 2 emissions. In most markets, however, third parties are used for distribution.
PepsiCo has a strong reputation for their supply chain capabilities. One leading analyst firm says PepsiCo runs the fifth best supply chain in the world. “The best way to reduce your environmental footprint,” Mr. Andrew averred, “is not to generate it in the first place. Reduce miles, reduce touches, become more efficient all the way through” your supply chain. Technology is used to help in this endeavor. The company is using Blue Yonder for transportation management, Coupa’s Supply Chain Guru for network design, and FourKites (see the webinar) for transportation visibility in certain regions or departments to help with this.
Some of their main investments are focused on trucks. There are continuing efforts to reduce the weight of their tractor and trailers in North America. The company is also accelerating deployment of its Geo Box delivery system, which replaces bay delivery trucks with specially designed trailers that are pre-loaded at the warehouse. This ensures the right quantity and assortment of products reaches their retail customers in a more efficient manner. PepsiCo Foods North America introduced tractors with liftable tandem axles which can lift the second axle if the load is not too heavy. Perhaps most significantly, later this year they will take delivery of their first Tesla Trucks Class 8. These electric trucks have no Scope 1 emissions.
A Supplier Action Plan
The biggest challenge in PepsiCo’s journey to net-zero by 2040 is reducing Scope 3 emissions. Scope 1 emissions include direct emissions from the company’s owned and controlled sources. Scope 2 emissions are indirect emissions from purchased energy. Scope 3 emissions are indirect emissions from products and services bought from suppliers and other value chain partners.
Scope 3 emissions accounted for 93% of global greenhouse gas (GHG) emissions for PepsiCo in 2021. As they work with their value chain, they know that this is their most significant sustainability challenge. They have asked they value chain partners to take four actions:
- Report their scope 1 and 2 emissions by the end of 2022.
- Develop an action plan for sustainable ingredients and share their plan for developing regenerative agriculture acres by the end 2022.
- Set a science-based target by end of 2023. Science-based targets are considered the best practice for setting GHG targets.
- And finally, convert PepsiCo’s portion of the electrical load to renewable electricity by the end of 2023.
PepsiCo realizes that making these significant changes in their suppliers’ operations is a big shift. In many cases, this is not just about investment but also changes in the way some suppliers will need to operate. Supplier relationships need to move from transactional deals to true sourcing partnerships with their most important suppliers. PepsiCo intends to act as a partner and provide support to guide suppliers on this journey. The company has tens of thousands of suppliers globally. But they are focusing initially on where they can have the biggest impact. Currently about 20% of their suppliers account for 80% of emissions. Packaging and agriculture are big areas of focus for the company.
The company has developed what they call pep+ 360; This is a supplier engagement activation plan. They have created pep+ profiles against the largest 20% of their suppliers to understand where those suppliers are in relation to what is being asked of them. They held a global supplier forum in May and are now holding regional forums with all suppliers they have relationships with. These are designed to share expectations but also create a collaborative approach to working together on a path forward. They need their suppliers to know that they are serious about their commitments but also that they are not on their own.
One key to this is transforming their approach to contracting with strategic suppliers. One example of this is their recent agreement with ADM (Archer-Daniels-Midland), one of their key corn suppliers in the US as well as one of the largest food processing and commodities trading corporations in the world.
Partnership is essential to delivering on the company’s sustainability commitment. PepsiCo usually relies on short-term supplier contracts to meet their evolving commodity needs. The new contract with ADM is a 7.5-year strategic partnership that will enable close collaboration on a range of crops and projects across North America to significantly expand regenerative agriculture across the shared supply chains. It will enable PepsiCo to share resources and collaborate to provide farmers with technical and financial assistance, offer access to peer regenerative farming networks, host educational field days, and track results using third-party measurement systems. The long-term agreement will initially enroll corn, soy and wheat farmers across Kansas, Minnesota, Iowa, Illinois, Indiana, and Nebraska, with the opportunity for future expansion.
Over the past year the food giant’s focus has been on establishing tools and resources to support suppliers in their value chain to drive emissions reduction. One example is pep+ REnew in partnership with Schneider Electric. This is designed to educate their value chain partners about their renewable electricity choices and quicken the transition to renewable electricity through aggregate power purchase agreements (PPAs).
PepsiCo’s Value Chain Starts on the Farm
About 55% of the company’s revenue is generated by food products, 45% from beverages. “Most people don’t think of PepsiCo as an agricultural company,” Mr. Andrew said, “but we have a very big agricultural footprint.” Because of the need to farm potatoes, oats, whole corn, sugar cane sugar beets and corn for sweeteners, about 7 million acres are needed to produce PepsiCo products. “We established a 2030 goal to take regenerative practices to those 7,000,000 acres.” 7 million acres is about the same amount of land that is farmed to produce PepsiCo’s products each year.
“Agricultural land can be either a net emitter or a carbon sink, depending on how those agricultural commodities are produced. Regenerative farming is a set of practices – we have 20 that we recognize – that help farmers lessen their environmental footprint,” Mr. Andrew explained. For example, on many large farms, mechanical tractors till the land. That deep tilling releases greenhouse gases into the atmosphere. However, if farmers can go “no till,” the farmer “not only avoids the release of carbon, but it also increases the amount of organic matter in the soil which decays and becomes carbon trapped in the soil.”
Verifying that farmers are engaged in regenerative farming practices is a very substantial effort. PepsiCo has farmers they directly source from. For example, they directly contract with potato farmers for Lay’s potato chips. These are often multi-generational relationships where the company has been purchasing proprietary varieties of potatoes from a farm for 20, 30, 40 or even 50 years. “We know who these farmers are, we work very directly with them.” Verifying the farming practices is still hard, but it is significantly less work when you know who you have sourced from.
When commodities are sourced indirectly, “we have a whole set of partnerships where we’re working with what are called ‘implementers.’” These are hyperlocal organizations like Practical Farmers of Iowa. “These are organizations,” Mr. Andrew continued, “that are very trusted by the farmers, they know the farmers they work with, and have deep roots, no pun intended, in the communities.”
PepsiCo must work with implementers. “We can’t go touch every farmer everywhere.” This is particularly true where there are “small holder farmers” in countries like India. “Transparency plus accountability is what generates trust.” PepsiCo reports on how many acres in their extended value chain are currently practicing regenerative farming.
I asked Mr. Andrew if every farm was visited at least once a year. He suggested, ”it varies a lot by commodity. We’re still in the early stages” for many types of commodities. The Bonsucro organic certification process for sugar cane is very well developed. In contrast, to get a majority of corn farmers in the Midwest to adopt regenerative practices is at a more embryonic level. “Ultimately we need to get to a system where there’s transparency and integrity around the claims that are being made.” Implementers “do the on the ground verification and they pay for outcomes.” PepsiCo, in turn, helps fund these partner’s organizations. But, Mr. Andrew admitted, “this is a massive job.”
Sustainability Requires a Different Way of Making Investment Decisions
To achieve Net Zero requires significant new investments as well as a different way of looking at capital investments. PepsiCo issued their first green Bond, in 2019, for a billion dollars. A green bond is a type of fixed-income instrument that is specifically earmarked to raise money for climate and environmental projects. The company came back into the market earlier this year and issued their second green bond for $1.25 billion.
But Mr. Andrew explained that they are trying to make sustainability a part of every capital and budgeting decision. “I want to make sure that sustainability has a seat at the table in every decision that gets made.” That does not mean that the more sustainable investment always wins out over an investment with a higher ROI, but the case for sustainability needs to be represented in every decision.
To that end, Mr. Andrew sits on the company’s most important capital allocation committee (this committee also includes the chief executive and financial officers). “There’s an explicit set of sustainability criteria that any capital appropriation request that comes to our committee has to address.”
One of those requirements is that the project include a shadow price for carbon at the industry standard rate of $50 a ton. A project’s internal rate of return (IRR) – a way of calculating the return on investment – is calculated without the cost of the carbon included. Perhaps the cost of a new factory would be $300 million. Then it is calculated with the carbon costs included, perhaps when the shadow tax is included the costs come out to be higher Mr. Andrew said that this way the full view of decisions are clearer to the committee when making decisions.
In terms of the way employees are measured, including the top executives, the company speaks of being “faster, stronger, and better. Faster is how do we grow faster and have better financial returns. Stronger is how do we build better capabilities. Better,” Mr. Andrew continued, “is how do we become a better company?” And sustainability is a big part of being better.