Is The Coca-Cola Company (KO) a Sustainable and Responsible Investment?
An update on Calvert’s assessment of and dialogue with the company.
When we announced our decision that The Coca–Cola Company (“Coca–Cola”) met Calvert’s most comprehensive environmental, social and governance “Signature” criteria in January 2011, we highlighted the company’s significant progress in several areas, particularly human rights and labor relations. We also noted areas that we considered to be continuing challenges for the company, such as water–related risk and a paucity of healthy options in its portfolio of products. Since then, Calvert has engaged with company management nine times to discuss these and other issues. Given the company’s enormous size, complexity, and brand visibility, we expect Coca–Cola to face corporate responsibility and sustainability challenges and to draw criticism. We also think it is important to acknowledge where the company has demonstrated significant progress as we keep our shareholders informed of our due diligence and continuing engagement around these critical issues.
Nutrition and Obesity
Calvert is concerned about the continued weight of sugary drinks in Coca–Cola's product in its portfolio; only about 25% of the Coca–Cola's products are low–or no–calorie drinks. Given global concern about childhood obesity, recent efforts to dampen demand for sugary drinks, and the fact that sales of carbonated soft drinks are falling about 3% per year, the company’s long–term growth prospects could be affected. In May of 2013 the company announced important commitments to combat global obesity. It will offer low–or no–calorie beverages in all of its markets, label the front of its products with calorie information, and not market to children under twelve worldwide. Stakeholders and investors will be monitoring the company closely to ensure that these pledges are followed, and will pressure the company to make additional commitments. And while these commitments are robust, global sales of no–and low–calorie sodas are also sharply down, calling into question the long–term viability of this strategy. A recent Wells Fargo study predicted overall soda sales will fall between 15–20% by 2020, fueled principally by a drop in diet soda. Whether the company’s bet that the natural sweetener stevia can stave off this loss of consumer confidence in diet soda remains to be seen.
One helpful tool for investors to understand the nutrition risk of specific companies is the Access to Nutrition Index (ATNI), a benchmark of food and beverage companies according to their commitments and actions related to developing and marketing healthy products and addressing under–nutrition. The ATNI ranks Coca–Cola ninth best of twenty–two companies evaluated on a series of metrics. The ATNI notes that Coca–Cola has done a good job of developing clear governance and stakeholder outreach on nutrition issues, and has also done a better job than many of its competitors on responsible marketing to children. Although the company is engaged in R&D related to low–and no–calorie sweeteners, the ATNI lowered the company's score for failing to provide targets for its R&D reformulation programs and not using a nutrient profiling system to drive reformulation targets. As an investor signatory to the ATNI process, Calvert is committed to raising these issues with Coca–Cola and other companies we hold, particularly on moving toward truly healthy offerings and innovation.
Labor and Human Rights
As we noted in our January 2011 article on the company, Coca–Cola has made important strides in modernizing its human rights and labor relations framework, starting in the late 2000s; until then the company had not taken responsibility for these issues within its entire system, including its bottlers and supply chain. The company introduced significant changes to its policies to protect workers–extending protection for the right to collective bargaining and freedom of association throughout its system, ensuring that these issues have board oversight, and instituting a comprehensive system for identifying and remediating problems in its own operations or its supply chain. These efforts are consistent with the UN Guiding Principles on Business and Human Rights, a globally–accepted set of standards for respecting human rights at the corporate level that stipulate a company’s need to “know and show” its commitment. Doing so requires certain policy commitments and programs, such as policies that are approved at the most senior level, a program for assessing potential or actual human rights impacts, consulting with affected groups, and remediating problems as they arise. In our view, the company has shifted its own operational culture and increasingly that of its bottlers to one that respects labor and human rights, which has been born out in better performance in this area. Although a company the size of Coca–Cola will always have issues related to labor relations, it remains one of the only large, US–based companies that recognizes and engages with unions at an international level.
Calvert has discussed a range of human rights and labor risks with the company. For example, health and safety is a concern for employees and contractors given that the company operates in 207 countries where there are a wide variety of cultures and regulations. Some of these operating areas have poor roads and limited infrastructure, posing additional risks. Migrant and child labor, particularly in the company's supply chain, is also a concern with Coca–Cola and throughout the food and beverage industry. A recent benchmark by Oxfam of the ten largest food and beverage companies' commitments on supply chain issues such as labor, land, water, farmers and transparency put Coca–Cola third best of the ten companies reviewed, though the analysis found that the entire industry was failing to address supply chain risks adequately. The Oxfam campaign recently focused specifically on Coca–Cola, PepsiCo and Associated British Foods for failing to manage land rights in their sugar supply chains. Although Coca–Cola is a founding member of the sugar certification program, “Bonsucro,” Oxfam has urged the company to adopt a policy specific to avoiding land grabs in its supply chains.
Coca–Cola faced serious controversy related to labor and human rights in Colombia in the late 1990s and early 2000s, where labor leaders were targeted by paramilitary groups in a protracted civil war. The company's bottler allegedly was involved in threats to union leaders, and was accused of orchestrated the murder of labor leaders. These accusations were later dismissed in court, though serious tensions remain with the Colombian bottling union. In response to these issues, the company helped found the Colombia Guidelines on Human Rights and International Humanitarian Law, a multi–stakeholder initiative that involves civil society, the Colombian government, and businesses. The initiative has provided guidelines on Security and Grievance Mechanisms, and is currently working on codes related to Labor Issues and Land.
Water Issues and Environmental Justice
Coca–Cola's immense size, presence in diverse ecosystems across the world, and brand value make the company's risk related to water stewardship significant. The company's sustainability and growth depend on a reliable supply of clean water for its direct or bottling operations, as well as for production of its raw materials in the agricultural supply chain, and the communities in which it operates and the watersheds it shares with them.
Coca–Cola has faced its most serious water challenges in India. At one plant in the state of Kerala, for example, the local community complained in 2008 that the company’s wholly–owned bottler had overdrawn local supplies of water, leaving residents with insufficient and polluted water. The former plant (closed several years ago), continues to be a lightning rod of discontent, and the company continues to fight a 2010 compensation claim by the Kerala government of $47 million.
In response to these issues, Coca–Cola tightened its water stewardship framework and reporting. It also established water commitments to:
- Return to communities and nature an amount of water equal to what the company uses in its finished beverages and their production by 2020.
- Improve water efficiency in manufacturing operations by 25 percent compared with a 2010 baseline, also by 2020.
- Assess the vulnerabilities of the quality and quantity of water sources for each of the Coca–Cola system’s bottling plants and begin implementing a local source water protection plans by the end of 2013 and begin their implementation. The company expects all plants to have completed source water protection plans and begin their implementation by the end of 2013.
- Return to the environment – at a level that supports aquatic life – the water used in system operations through wastewater treatment. Currently 99% of the company's own plants and 98% of bottling plants are compliant with wastewater treatment standards.
These efforts are detailed in the company's water report.
Coca–Cola has taken a leadership role in the CEO Water Mandate and committed to extensive water disclosure, including entire water footprints of specific products. The company also committed to a “rights–based” approach to water use, and to be “water–neutral” through water recycling and recharging of aquifers by watershed management and community access.
Although Coca–Cola has clearly improved its approach to environmental and social risks, we think that the company needs to focus on governance as well. The company has issues of entrenchment and independence of board directors; seven directors are over the age of 70, six of the 17 directors have been on the board over 20 years, and two for over 10 years. Moreover, according to an analysis by a governance metrics research company, GMI, the CEO’s remuneration is “not well aligned with sustainable shareholder interests,” as his total compensation package is just over $29 million. We find this troubling given the duality of the CEO’s role as board Chair and CEO of the company. Given that the company’s strong presence in emerging markets where sustainability challenges are most pressing, we think that the company’s board structure and makeup should be modernized to address sustainability challenges and opportunities.
The company's enormous size and reach affords not only major sustainability risks, but also opportunities. Coca–Cola has made women's empowerment and economic development a keystone of its sustainability strategy. Calvert agrees that empowering women – particularly in poor countries in Asia and Africa – is central to addressing Millennium Development Goals, such as the reduction of hunger, improving access to clean water and sanitation, and economic opportunity. Coca–Cola recently won the prestigious Catalyst award for its efforts to promote women within the company and its commitment to provide economic empowerment to five million women by 2020. To do so, the company is collaborating with Technoserve, the Bill and Melinda Gates Foundation, and others. Moreover, a 2013 Calvert report, Examining the Cracks in the Ceiling, found that Coca–Cola was ranked third of all S&P 100 companies when evaluated on its public commitments to ten diversity indicators, including board diversity. Although the company has had some performance issues related to diversity, we are encouraged by this global approach to women’s empowerment.
Coca–Cola has been addressing significant controversial issues, especially related to labor and human rights, water, and product nutrition. Nonetheless, large, consumer–facing companies like Coca–Cola are challenging for firms like Calvert to hold, requiring additional due diligence and engagement, including collaborating with other investors and stakeholders. Our goal is to push for improvements not only in the company’s commitments and structural changes, but also in performance. We will continue to monitor Coca–Cola, press for additional attention to sustainability risks and opportunities, and keep our clients informed of progress as well as continuing challenges.