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PepsiCo – Pesticide Pollution (2015)

PepsiCo – Pesticide Pollution (2015)

Outcome: 7.5%

PepsiCo’s Global Sustainable Agriculture Policy states it “supports sustainable agriculture practices that … improve product value by maximizing the desired outputs …while minimizing the required inputs and avoiding any negative impacts to the farm and surrounding lands.” The Company’s Sustainable Farming Initiative “enables PepsiCo to measure the environmental and local economic impacts associated with [its] agricultural supply chain.”

Yet, Pepsi is a major purchaser of corn, oats and potatoes — crop types that are routinely pre-treated with neonicotinoids (‘neonics’), a class of insecticide linked to declines in pollinators and other beneficial organisms, and negative impacts to land and water (according to the International Union for Conservation of Nature and the United States Geological Survey.)

According to the United States Department of Agriculture, “bee-pollinated commodities account for $20 billion in annual United States agricultural production and $217 billion worldwide.” Multi-year double digit declines in pollinators in the United States and Europe pose risks to our food system.

Neonic use is growing rapidly. In 2011, 3.5 million pounds of neonics were applied to agricultural crops, a twofold increase in five years. Neonics account for roughly 25 percent of the global agrochemical market and are one of the most widely used insecticides. More than 90 percent of corn and 30-40 percent of soybeans planted in the United States is pre-treated with neonics. Their prevalence in agriculture, compounded by their ability to persist in soils and become mobile in waterways, further magnifies the risks.

As their use has increased, so has scientific, regulatory and public concern. In December 2013, the European Union enacted a two year ban on three neonics. In June 2014, President Obama established a “Pollinator Health Task Force” charged with “understanding, preventing and recovering from pollinator losses.” In July 2014, the United States Fish and Wildlife Service announced plans to restrict neonic use across the Wildlife Refuge System.

Concern about the efficacy of neonics is growing. In October 2014, the Environmental Protection Agency reported that pre-treating soy seeds with neonics provided little or no benefit to production.

In light of these risks, companies are taking action:
• Under Whole Foods’ Responsibly Grown Rating System, its “best” rating can only be achieved by suppliers that prohibit the use of four neonics.
• Home Depot is working with suppliers to phase out neonics on live goods.

RESOLVE: Shareholders request that by September 1, 2015, the Board publish a report, at reasonable expense and omitting proprietary information that discusses the Company’s options for policies, above and beyond legal compliance, to minimize impacts of neonics in its supply chain.

Supporting statement: We believe the report should include:
• An assessment of the supply chain, operational or reputational risks posed to the company by large-scale applications of neonics;
• Practices and measures, including technical assistance and incentives, provided to growers to reduce the harms of neonics to pollinators, and
• Quantitative metrics tracking the portion of supply chain crops pre-treated with neonics.

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Additional Information for Pepsico Shareholders

Proponents: The Sustainability Group of Loring, Wolcott & Coolidge and Trillium Asset Management are the lead filers. The Green Century Equity Fund is the co-filer.

Investor contacts: Larisa Ruoff, The Sustainability Group, lruoff@lwcotrust.com; Susan Baker, Trillium, sbaker@trilliuminvest.com

PEPSICO (“PEPSI” OR “THE COMPANY”) FAILS TO ADEQUATELY ADDRESS THE RISKS TO ITS SUPPLY CHAIN ASSOCIATED WITH THE DECLINE IN BEES AND OTHER POLLINATORS.

RESOLVE: Shareholders request that by September 1, 2015, the Board publish a report, at reasonable expense and omitting proprietary information that discusses the Company’s options for policies, above and beyond legal compliance, to minimize impacts of neonics [neonicotinoids] in its supply chain.

Supporting statement: We believe the report should include:

• An assessment of the supply chain, operational or reputational risks posed to the Company by large-scale applications of neonics;
• Practices and measures, including technical assistance and incentives, provided to growers to reduce the harms of neonics to pollinators, and
• Quantitative metrics tracking the portion of supply chain crops pre-treated with neonics.

RATIONALE FOR A VOTE IN SUPPORT OF THIS PROPOSAL:

1. As a purchaser of specialty crops that require pollination, Pepsi potentially faces significant risk as a result of the decline in bees and other pollinators.

2. As a major purchaser of key commodity crops grown from seed commonly pre-treated with chemicals that have been implicated in contributing to pollinator declines, Pepsi is also a major contributor to the problem of pollinator decline.

3. Pepsi’s disclosure of how it is assessing, mitigating and managing risks in these areas is insufficient.

BACKGROUND

Bees and other pollinators play a significant role in global food systems. About one out of every three bites we eat comes from plants pollinated by honeybees.

According to the U.S. Federal Government:

• “Honey bees enable the production of at least 90 commercially grown crops in North America. Globally, 87 of the leading 115 food crops evaluated are dependent on pollinators, contributing 35% of global food production.
• Pollinators contribute more than 24 billion dollars to the United States economy, of which honey bees account for more than 15 billion dollars through their vital role in keeping fruits, nuts, and vegetables in our diets.”

According to researchers, native pollinators alone contribute more than 3 billion dollars to the U.S. agricultural economy.
However pollinator populations have declined significantly posing potentially serious risks to a number of companies. This decline is attributable to multiple stressors; however, evidence has emerged those neonicotinoid pesticides, or “neonics,” the most widely used class of insecticides in the world, are a major contributor to recent declines.

Use of neonics, a neuro-active class of systemic pesticides, has grown significantly in recent years. While initially thought to be less harmful to humans than other insecticides, neonics are particularly harmful to bees.

In July 2014, a meta-analysis of 800 peer-reviewed studies by the Task Force on Systemic Pesticides — a global group of independent scientists — confirmed neonicotinoids are a key factor in bee declines, and are harming beneficial organisms essential to functional ecosystems and food production, including soil microbes, butterflies, earthworms, reptiles, and birds. The analysis finds that “Overall, the existing literature clearly shows that present-day levels of pollution with neonicotinoids and fipronil caused by authorized uses (i.e. following label rates and applying compounds as intended) frequently exceed the lowest observed adverse effect concentrations for a wide range of non-target species and are thus likely to have a wide range of negative biological and ecological impacts. The combination of prophylactic use, persistence, mobility, systemic properties and chronic toxicity is predicted to result in substantial impacts on biodiversity and ecosystem functioning.”

According to Dr. Jean-Marc Bonmatin of The National Centre for Scientific Research in France and a lead author of the study, ” Far from protecting food production, the use of neonics is threatening the very infrastructure which enables it, imperiling the pollinators, habitat engineers and natural pest controllers at the heart of a functioning ecosystem.”

At the same time, the efficacy of neonics is debatable. In October 2014, the Environmental Protection Agency reported that pre-treating soy seeds with neonics provided little or no benefit to production. In March 2014, the Center for Food Safety released a report citing eight peer-reviewed studies that show a lack of a significant yield benefit from neonic treatments.

Given these impacts and concerns about efficacy, the proponents believe Pepsi should demonstrate to shareholders it has assessed and is mitigating its neonic-related risks by reporting on the following:

• Its assessment of the supply chain, operational or reputational risks posed to the Company by large-scale applications of neonics;
• The practices and measures, including technical assistance and incentives, provided to growers to reduce the harms of neonics to pollinators, and
• Quantitative metrics tracking the portion of supply chain crops pre-treated with neonics.

PEPSI POTENTIALLY FACES SIGNIFICANT RISK AS A RESULT OF THE DECLINE IN BEES AND OTHER POLLINATORS.

The following risks could affect Pepsi or its supply chain:

FINANCIAL RISKS:

If the decline in pollinators continues, the price for such services will increase, raising costs throughout the supply chain. In addition, it may become increasingly difficult or expensive to procure certain crops and products.

To demonstrate these risks, a Rhode Island Whole Foods Market removed all produce that comes from plants dependent on pollinators. It found that over half of its normal product mix, or 237 of 453 products, were removed.

Researchers estimate the value of ecosystem services to humans from all wild insects in the United States to be near 60 billion dollars per year. Given this high value, the amount justified to protect these wild insects from threats could come at a cost of tens of billions of dollars to business and ultimately consumers.

Crops such as almonds, almost exclusively pollinated by bees, face unique risks. According to the U.S. Federal Government, “California’s almond industry alone requires the pollination services of approximately 1.4 million beehives annually—60% of all U.S. beehives—yielding 80% of the worldwide almond production worth 4.8 billion dollars each year.” In 2014, an estimated 15-25 percent of the colonies used for almond pollination were damaged due to pesticides. After expressing concern about pesticide labeling and use, and reporting estimated damages between 63 and 106 million dollars at a meeting with EPA, the Pollinator Stewardship Council, the American Beekeeping Federation and American Honey Producers Association, beekeepers promised to add a pesticide surcharge to almond pollinator contracts.

According to the Pollinator Stewardship Council, almond pollination has implication for the entire fruit and vegetable pollination chain:
“Almonds are the beginning of the crop pollination season. Almonds are the first crop honey bees pollinate. What happens to honey bees in almonds affects the ability of crop pollination services to apples, cranberries, canola, tangelos, blueberries, squash, watermelon, kiwi, plums, apricots, cherries, seed crops, and so much of our vegetables and fruit. One beekeeper who pollinates Washington apples after almonds was short 1200 hives due to his losses during almond pollination. What happens to honey bees in almonds does not stay in almonds; it affects how many bees are available to pollinate other crops, the cost of pollinating those crops, and the cost of the food you buy to feed your family.”

Pepsi procures almonds and many other specialty crops, such as apples and oranges, which are dependent on pollinators. As a result, the Company faces financial risk if the decline in pollinators results in increased costs.

REGULATORY ACTIONS:

In the face of the above concerns, policymakers in the United States and internationally are starting to respond. As regulatory action increases across the US and at the national level, restrictions may be put in place to limit the use of neonics. The proponents believe Pepsi should assess where such risks lie and start to work toward protective measures to reduce such risks.

EUROPEAN UNION

• In January 2013, the European Food Safety Authority found three neonics posed “high acute risks” danger to bees. On December 1, 2013, a two year moratorium on the use of three neonics (thiamethoxam, clothianiden, and imidacloprid) went into effect in the European Union.
• In March 2015, a judge ruled against Bayer’s attempt to sue an NGO over its claims that Bayer’s pesticide thiacloprid harms bees. Debate has since focused on the potential action of adding a fourth neonicotinoid to the three already banned in the EU.

US—FEDERAL LEVEL

• In June 2014, the White House announced a federal strategy to reverse the decline of bees and other pollinators.
• In November 2014, ten Senators sent a letter urging the EPA to swiftly address the risks pesticides pose to pollinators.
• In September, 2014, 60 Members of Congress sent a letter to the EPA pressing for specific changes necessary to protect pollinators.
• In July 2013, Representatives John Conyers (D-MI) and Earl Blumenauer (D-OR) introduced “Save America’s Pollinators Act” (HR 2692). The bill mandates removal of neonicotinoids from the marketplace until EPA completes its review.

US—STATE AND LOCAL LEVEL

• California, Minnesota and New York are among the states considering action in their state legislatures.
• A number of municipalities in the past year have issued bans on the use of neonicotinoid insecticides. Eugene, OR became the first city to do so in February, 2014. Seattle, WA enacted a ban in September, 2014. Thurston County, WA (including Spokane and Olympia) becoming the first county government to pass a ban on neonics. The Borough of Skagway, AK banned the use and sale of neonicotinoid-containing products on all public and private lands in fall 2014.
• In July 2014, the United States Fish and Wildlife Service announced plans to restrict neonic use across the National Wildlife Refuge System.

CANADA

• In October 2014, the Vancouver park board instituted a ban on neonicotinoids, which includes no longer planting or purchasing plants treated with this class of pesticides.
• In November 2014, the Ontario government moved to limit the use of neonicotinoids, including an 80% reduction in acreage planted with neonics treated corn and soybean seeds.

LEGAL ACTIONS

• The Natural Resources Defense Council (NRDC) filed a petition with the EPA seeking interim administrative review of neonicotinoids because of their environmental impacts.
• Non-profit groups in California filed suit against the Department of Pesticide Regulations arguing an assessment of the safety of neonicotinoids was not properly conducted ahead of authorizing their expanded use in the state.
• Canadian bee keepers filed a lawsuit against pesticide manufacturers in September seeking millions in damages.

REPUTATIONAL RISKS

• Declining bee populations threaten the health of farming systems and communities, therefore, becoming a growing public concern.
• In February, 2014 a national environmental organization and its allies organized a large coordinated store front action asking companies to stop selling bee-killing pesticides at Lowe’s and Home Depot stores in Washington D.C., Chicago and San Francisco.
• In March, 2014 more than a half million signatures were delivered to the EPA by NGOs in support of a letter urging the agency to protect bee health and by suspending all outdoor use of neonicotinoids.
• In January 2015, over 100 food companies sent a letter to the U.S. Federal Government pressing for the immediate suspension of the use of pesticides linked to pollinator declines.

COMPANY ACTIONS

• In June 2014, Home Depot announced that before year end, it will require suppliers to label all plants treated with neonics, and will help suppliers eliminate their use. In addition, the Company now offers customers a list of neonic-free alternatives for home use.
• General Mills is partnering with subject experts and growers in its supply chain and funding multiple initiatives to increase native habitat for bees. According to its website, “Keeping bees healthy is a priority for General Mills which is why we proactively fund pollinator research to better understand why bees are in decline, invest to conserve and expand bee habitats and work with our suppliers to improve the health and effectiveness of bees.” Further, the Company’s Global Responsibility Report, discloses specific products impacted by pollinators and provides more detail on its efforts to collect data and monitor bee health.
• Whole Foods Market is working on a variety of fronts to address this issue. They are partnering with NGOs including the Xerxes Society, while running public education campaigns in their stores. In fall 2014, the company unveiled a ranking system for its produce and flowers. The Responsibly Grown rating standard awards its “best” ranking to products that meet a number of sustainability measures including standards to protect pollinators.

PEPSI IS A SIGNIFICANT CONTRIBUTOR TO THE PROBLEM OF POLLINATOR AND HAS THE OPPORTUNITY TO BE PART OF THE SOLUTION AS WELL


PEPSI’S ROLE IN THE PROBLEM OF POLLINATOR DECLINE AND INCREASED NEONIC USE:

Pepsi is a contributor to the problem of pollinator decline because it is a major purchaser of key commodity crops routinely pretreated with chemicals that have been implicated in contributing to pollinator declines.

According to the Company’s analysis of its priority commodities, Pepsi is a major purchaser of corn, oats and potatoes, and a minor purchaser of soybeans — crop types that are routinely pre-treated with neonics. More than 90 percent of corn and 30-40 percent of soybeans planted in the United States are pre-treated with neonics.

Given this widespread use, these commodities are a major contributor to the significant growth in neonics in recent years. In 2011, 3.5 million pounds of neonics were applied to agricultural crops, a twofold increase in five years. Neonics account for roughly 25 percent of the global agrochemical market and are one of the most widely used insecticides. Given this widespread use, corn and soybeans are a major contributor to the increase in use of neonics.

Pepsi is also a purchaser of key ingredients including apples and oranges dependent on pollinators. Chronic declines in pollinator populations could impact cost and availability of vegetables, fruits and nuts.

GIVEN THIS MARKET INFLUENCE, PEPSI HAS THE OPPORTUNITY TO BE PART OF THE SOLUTION:

With three companies controlling more than half the world’s commercial seed market, farmers have few alternatives. However, Pepsi is a highly visible company, a large purchaser of commodity crops and a company with public facing sustainable agriculture goals. Therefore this affords the company a notable sphere of influence allowing it to create shifts in grower practices and promote use of seeds not coated with neonicotinoids.
A market for seeds not treated with neonicotinoids is available. At this writing it is small but visible. Dupont Pioneer is offering corn seeds that have not been treated with neonics in Canada. Albert Lea Seed Company in Minnesota is also offering non coated seeds to its customers.
The growth of these alternatives in the marketplace will depend on companies like Pepsi who have close working relationships with farmers in Europe, and are dedicated to supporting sustainable agriculture practices.

PEPSI’S DISCLOSURE ON HOW IT IS ASSESSING, MITIGATING AND MANAGING ITS RISKS IN THIS AREA IS INSUFFICIENT.

Pepsi has a strong stated commitment to sustainable agricultural practices. According to its website, “Because of the critical importance of growing crops to PepsiCo, we are working to incorporate in our operations the best thinking, practices and technology to support sustainable agriculture.” Yet the company does not disclose information regarding outcomes of any pesticide risk assessment.
In 2012, the Company embarked on a “Sustainable Farming Initiative” (SFI). The SFI “is a comprehensive program with application to potato, citrus, oats, rice and corn crops and to growers of all sizes in developed, developing and emerging markets.” It enables PepsiCo to document the “environmental and local economic impacts associated with our agricultural supply chain.”

The Company states in its Opposition Statement printed in the 2015 Proxy, “Through the SFI PepsiCo is in the process of gathering additional information on pesticides, their use and application rates.”

While SFI “enables” PepsiCo to document the company has not made a public commitment to report on how they are tracking performance on this issue. In dialogue, we asked the company to provide progress to date around the Company’s efforts through SFI to optimize the use of pesticides since it is nearly a three year old program. The Company has declined our request.

The Company states in its Opposition Statement in the 2015 Proxy, “We have recognized pesticides, and their impact on beneficial insects such as bees, as an important issue within PepsiCo’s supply chain, and we are implementing procedures and policies to measure and address the use of pesticides in our supply chain and minimize their unintended impacts. However, we do not believe disclosure of the detailed information requested in the proposal for such a single issue purpose is a prudent use of the Company’s resources… We believe our time and resources would be better used in the continuation of our current policies and practices regarding our supply chain impact. ”

A search of PepsiCo’s website reveals no reference to a recognition of pesticides and their impact on beneficial insects such as bees. The Company states in its Opposition Statement to this proposal that it is “implementing procedures and policies to measure and address the use of pesticides. No disclosure of these procedures is given on its website, therefore investors cannot assess the Company’s ability to manage risk. Fertilizers and efforts to reduce their impacts are referenced on the Company website. However, fertilizers differ significantly from system pesticides including neonicotinoid insecticides. As a result, the Company has yet to demonstrate it has assessed its risks related to the decline in pollinators and a prolific use of neonic pesticides in the agricultural supply chain.

In stating that time and resources can be better used elsewhere and that this proposal addresses a single issue causes us concern. First, it sends a signal that the Company may not believe that this issue has risen to a level of significant public concern. The heightened interest and action as documented earlier on the issue of pollinator decline and the role neonics play does, in our view, characterize a growing public concern. Second, we can argue that it is not a single issue.

Further, while multiple factors are contributing to pollinator declines, neonics are a well- documented key culprit. Neonics are a broad class of system insecticide. Addressing bee health will require companies to examine use of pesticides, particularly neonics. Despite having operations in the U.K. and Europe where this issue is also a significant public concern (PepsiCo’s Capella apple juice business is U.K. based) the Company is notably silent on issues pertaining to bee health.

Because of the risk the decline in pollinators poses to the Company’s supply chain and its contribution to the problem of increased neonic use through its commodity purchases, we are particularly troubled by Pepsi’s lack of disclosure on this issue. Clearly, Pepsi has a stated commitment to sustainable agriculture and works closely with the farmers in its supply chain to mitigate potential impacts of their operations. Yet, the Company fails to acknowledge the decline in pollinators publicly, efforts to address the use of pesticides in its supply chain and efforts to minimize their unintended impacts. PepsiCo does not provide disclosure on any efforts to assess or mitigate and reduce its contributions to this problem, unlike companies in the food and home improvement sectors.

CONCLUSION:

We recognize the Company has policies to address fertilizer inputs. However, we remain concerned that Pepsi has not yet put in place a comprehensive system for tracking and disclosing the progress made on these issues. Given the risks associated with the widespread use of pesticides such as neonics, the proponents encourage the company to improve its disclosure in the following ways:

• Assess its supply chain for operational or reputational risks posed to the Company by large-scale applications of neonics;
• Improve its reporting on the practices and measures, including technical assistance and incentives, provided by the Company to growers to reduce the harms of neonics to pollinators, and
• Clarify any quantitative metrics tracking the portion of supply chain crops pre-treated with neonics.
Increased transparency in the above areas would give shareholders the information necessary to determine if Pepsi is adequately managing the risks associated with pollinator decline.

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Important Disclosure: The views expressed are those of the authors and Trillium Asset Management, LLC as of the date referenced and are subject to change at any time based on market or other conditions. These views are not intended to be a forecast of future events or a guarantee of future results. These views may not be relied upon as investment advice. The information provided in this material should not be considered a recommendation to buy or sell any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. To the extent specific securities are mentioned, they have been selected by the authors on an objective basis to illustrate views expressed in the commentary and do not represent all of the securities purchased, sold or recommended for advisory clients. The information contained herein has been prepared from sources believed reliable but is not guaranteed by us as to its timeliness or accuracy, and is not a complete summary or statement of all available data. This piece is for informational purposes and should not be construed as a research report.

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