S m i t h S c h o o l o f E n t e r p r i s e a n d t h e E n v i r o n m e n t , U n i v e r s i t y o f O x f o r d ,

S o u t h P a r k s R o a d , O x f o r d , O X 1 3 Q Y , U K .

Bridging the Gap Developing a model for infrastructure funding that breaks

down the barriers to infrastructure investment

Project Deliverables for Objective #1 This document provides an overview of the conditions that underwrite the success of this intervention

(Deliverable #1), offers strategies that could be followed that minimises project risks and maximises

opportunities (Deliverable #2), and demonstrates the value to PepsiCo of undertaking this

intervention (Deliverable #3).

ii

Table of Contents

Introduction: Investing in Water Infrastructure and PepsiCo’s Sustainability Agenda 1

Deliverable # 1: Critical Success Factors 4

1. The impact of the intervention has demonstrable impact against PepsiCo’s Performance with

Purpose targets ................................................................................................................................ 4

2. The existence of an identifiable water infrastructure challenge, which is specific (i.e.

bounded) as well as addressable within the scope of the project .................................................... 5

3. The water infrastructure problem poses a material challenge to the company, as well as to

suppliers, consumers, regulators, (local) governments, and communities ...................................... 5

4. There is a decisive role for the company to play in addressing the water infrastructure

problem ........................................................................................................................................... 6

5. There is a supporting network of existing stakeholders and initiatives in the field

undertaking related interventions .................................................................................................... 7

6. Any proposed intervention should be aligned with the established public sector agenda, as

well as with the agenda of other potential partners ....................................................................... 10

7. The capital market is well-developed, allowing financial mechanisms to be deployed to

solve the water infrastructure problem. ......................................................................................... 12

Deliverable #2: Risk and Opportunity Assessment 14

Identify strengths and opportunities .............................................................................................. 14

Identify Risks to Project Success .................................................................................................. 16

Develop conceptual mitigation plans ............................................................................................ 17

Deliverable #3: The Business Case 18

Scope of Infrastructure Investments ............................................................................................. 18

The Investment Case ..................................................................................................................... 19

The Role of Stakeholder Relationships ......................................................................................... 21

Summary and Next Steps 23

iii

List of Figures

Figure 1: Stakeholder Map of Mexico .................................................................................................... 8

Figure 2: Basic Components of the 2030 Water Plan ........................................................................... 11

Figure 3: Key Bodies Governing Water in Mexico .............................................................................. 11

Figure 4: Latin American Green Bonds by Type of Issuer (2014-2017) .............................................. 13

Figure 5: Scope of Infrastructure Investments ...................................................................................... 18

Figure 6: Inversion of Tangible and Intangible Assets ......................................................................... 20

Figure 7: An Advanced Model of Corporate Ecological Responsiveness ............................................ 20

Figure 8: Scenario 1 .............................................................................................................................. 21

Figure 9: Scenario 2 .............................................................................................................................. 22

List of Tables

Table 1: Risks to PepsiCo’s plants in Mexico ........................................................................................ 6

Table 2: Stakeholder Support in Mexico ................................................................................................ 9

Table 3: Selected Projects ..................................................................................................................... 10

Table 4: Green Bonds issued in Mexico ............................................................................................... 12

Table 5: PepsiCo strengths and opportunities by investing in sustainable water infrastructure ........... 15

Table 6: Internal risks to PepsiCo undertaking the intervention ........................................................... 16

Table 7: Matrix - Strategies to maximise opportunities and minimise risks ......................................... 17

1

Introduction: Investing in Water Infrastructure and PepsiCo’s

Sustainability Agenda

Through its agenda Performance with Purpose (PwP), PepsiCo has established itself as a global

sustainability leader, demonstrating the role that the corporation can play in addressing worldwide

sustainability challenges, including water. Working towards achieving its ambitious Positive Water

Impact goals – a part of its 2025 Planet Agenda PepsiCo is already illustrating how a corporation can

act as a water steward, and strive to mitigate its water risk in its operations and value chain, whilst

simultaneously play a significant part in ensuring water security to other users who also depend on

water availability. Water, being at the core of PepsiCo operations, is what ensures its business

continuity, and what marks its relation with local populations and its wider reputation.

Water also represents one of the greatest challenges of the 21st century. However, because of the

multi-faceted nature of water itself, holding as it does a central position in environmental systems,

human livelihoods, and economic activities – and the range of issues that as a result are embedded

within the crisis – addressing it is a matter of great complexity. As water issues become more

widespread, companies can no longer assume a stable supply of freshwater. For companies like

PepsiCo that rely on water to produce its goods and services, growing water issues constitute a direct

threat to business operations. The risk exposure derived from water insecurity is multifaceted, and is

expressed as physical, regulatory, as well as reputational risks. Confirming the serious threat water

could pose to business, the World Economic Forum has, since 2015, listed water in the top three

global risks in terms of impact.

Insufficient water infrastructure, and a sustained deficiency of investments in maintaining and

upgrading it, is one reason why some areas are exposed to water insecurity. Particularly in the global

South, there is a gap between the levels of investment required and the water infrastructure that is

being built. There are a wide range of factors that prevent sufficient investments to flow, but two of

the main barriers that prevent investments are, on the one hand, the availability of capital and, on the

other, the cost of the available capital. In regard to the former reason, McKinsey & Company

estimates that globally, $3.3 trillion of investments are required annually in infrastructure to support

currently expected growth rates. Emerging economies will account for about 60% of that need. If

current trends of underinvestment continue, it is estimated that the world will fall short by

approximately $350 billion a year (11%). Including the additional investments required to meet the

Sustainable Development Goals (SDGs), the size of the gap triples. In regard to the latter, the water

utilities’ borrowing rates, determined by sovereign country risk ratings, vary across countries, setting

a negative correlation between their development level and their access to financial resources. Thus,

emerging economies – where such investments are most needed – face a borrowing cost that is almost

prohibitive.

In collaboration with PepsiCo, we seek to develop a model for infrastructure financing that breaks

down barriers to infrastructure investment, enabling the development of local water infrastructure that

is vital both to PepsiCo’s long-term business strategy and to the welfare of the communities where the

company operates. The project’s aim is threefold: to increase the availability of capital available for

investing in new and existing water-related infrastructure in places where such investments drive cost-

effective mitigation of water insecurity for PepsiCo; to lower the cost of making such investments by

levering PepsiCo’s access to low-cost capital; and to utilise PepsiCo’s unique position, including its

knowledge, experience, and resources to implement a project that has a positive impact on the area of

2

implementation, and which also has demonstrable impact against PepsiCo’s 2025 Positive Water

Impact goals. Based on the internal capacities and strengths that global corporations have, this project

points to a new way for companies to join the water infrastructure financing challenge. Companies,

such as PepsiCo, can bring access to low-capital markets to emerging economies and assist with

financing the required water infrastructure. Through this, PepsiCo could contribute to mitigate water

insecurity, and support the implementation of the Sustainable Development Goals; issues that are

critical to communities as well as business.

There are several elements of innovation integral to this project. Firstly, it draws attention to how

PepsiCo can respond to the new pressures placed upon them by society, deliver its PwP agenda, and

further its transformation into a ‘Purposeful Corporation’. To prosper over time, every company must

not only deliver financial performance, but also show how it makes a positive contribution to society.

Without a sense of purpose, a company will ultimately lose the license to operate from key

stakeholders. A great driver behind this shift towards greater interconnectedness between society and

business is the change in the nature of the corporation itself. Studying the evolving role of the

corporation throughout the course of its history, Colin Mayer suggests that it has been transformed

from a public entity engaged in the construction of tangible canals and railways, to ‘mindful

corporations’ operating predominantly with intangible assets – “a corporation sans machines, sans

man, sans money, sans everything” (Mayer, 2016: 56). To ensure that corporate value can continue to

grow, a new role for the corporation needs to be envisioned; a role where it commits to furthering the

interests of its customers and communities, as well as enhancing the wealth of its investors.

Secondly, this work contributes to develop new modes of collaboration. PepsiCo’s extensive

experience in partnering with municipalities, utilities, and local actors to invest in water infrastructure

such as water treatment plants, rainwater collection, and water reuse technology is a crucial

component of the project. Local partnerships have been at the core of PepsiCo’s work on operational

water solutions, and of its work on advocacy for strong water governance in communities and

watersheds where their plants operate for a long time. Drawing on these experiences, this work

nevertheless seeks to venture further than traditional PPP agreements, or ‘Collective Action’ as a

mode of stewardship. Whilst these trends have been critical in furthering the water agenda, they have

not resulted in the transformative changes needed to ensure water security for the 21st century. This is

in part because they have failed to capture the full potential that the corporation can bring to these

ventures. The objective of this project is to forge a new type of partnership that brings actors together,

driven by their rational self-interest, and builds on their unique capabilities and strength to achieve

mutual objectives in shared locations of interest.

Finally, this project also brings an element of financial innovation to the water infrastructure

challenge. As noted, the financing gap to achieve sufficient water infrastructure coverage – as well as

for achieving the broader Sustainable Development Goals – is vast. In the last few years, the financing

landscape for water has seen significant diversification, with mechanisms like blended finance, green

bonds, local currency financing, and social impact investing proliferating. This project aims to draw

on these trends, and test how the corporation can play a part in closing the financing gap through the

use of such innovative mechanisms.

To develop the conceptual framework for this water infrastructure-financing model, we focused on a

specific market to test the concepts, and develop the conditions for the success of the project. In

collaboration with PepsiCo, we have selected Mexico as the potential place to develop the framework

for a pilot project. Mexico, one of PepsiCo’s biggest markets, is faced with severe water stress in both

in urban and rural locations. Droughts, floods, and population growth are contributing to exacerbate a

problem that partly arises from a lack of sufficient and appropriate water infrastructure to address

water insecurity in the country. Simultaneously, as an emerging economy, Mexico holds a

consolidated financial market that has successfully raised seven green bonds in the last two years

aimed to finance or refinance sustainable water infrastructure projects.

3

Objective #1 of this project is to design a framework that defines and quantifies the business necessity

for corporate investment in municipal infrastructure, where such investment drives cost-effective

mitigation of water insecurity. This document outlines the three first Project Deliverables associated

with Objective #1. For this end, it provides a detailed analysis of the conditions that underwrite the

success of this intervention, offers strategies that could be followed that minimises project risks and

maximises opportunities, and demonstrates the value to PepsiCo of undertaking this intervention in

Mexico. Through a combination of desk-based research and field research, the project integrates the

theoretical aspects of the model as well as the practical and side of the intervention.

The innovative and exploratory nature of this project, however, means that outcomes are not pre-

ordained. However, each stage will be thoroughly analysed and documented, and therefore generate

valuable lessons, which can be developed and implemented in various forms in different locations.

Moreover, whilst Mexico is utilised as a case study, the construction of a framework, and the resulting

mechanisms, concepts and models are transferable. They may thus be shared with the wider business

community, or brought to other locations by PepsiCo identified as high-risk priority areas, to leverage

impact to scale.

4

Deliverable # 1: Critical Success Factors

PepsiCo’s internal global water risk assessment (WRI Aqueduct) shows that the company faces water

risks in Mexico. The presence of water risk, however, is not enough to motivate an intervention of this

nature; a number of other conditions also have to be present. This section outlines the seven

conditions identified, which underwrite the success of the proposed intervention: a demonstrable

impact against PepsiCo’s PwP goals (criterion 1), an existing infrastructure problem (criterion 2), an

incentive for PepsiCo to act as the solution provider (criteria 3 & 4), a supporting network of

different stakeholders (criteria 5 & 6), and a mature capital market enabling project execution

(criterion 7).

1. The impact of the intervention has demonstrable impact against PepsiCo’s Performance with

Purpose targets

For a company to undertake an intervention of this nature, being able to demonstrate impact against

its internal targets and objectives is critical. The proposed intervention could directly contribute to

PepsiCo’s water goals, as set out in its Performance with Purpose agenda. Specifically, it could

contribute to selected goals on the Positive Water Impact agenda:

Water-use efficiency (direct operations):

· 2025 GOAL: Build on the 25% improvement in water-use efficiency achieved to date with an

additional 25% improvement by 2025, with a focus on manufacturing operations in high-

water-risk areas;

· 2025 GOAL: Maximise water reuse in high-water-risk areas and ensure that 100% of

wastewater from operations meets PepsiCo's high standards for protection of the environment.

Respect for water as a human right (beyond direct operations):

· 2025 GOAL: Advocate for strong water governance in communities and watersheds where

PepsiCo operates, promoting water solutions that meet local water needs;

· 2025 GOAL: Initiate and support collaborative efforts with other stakeholders to address

water risk and mitigate water insecurity;

· 2025 GOAL: With the PepsiCo Foundation and its partners, work to provide access to safe

water to a total of 25 million people since 2006 in the world's most at-water-risk areas, with a

focus on communities near where PepsiCo works.

The proposed intervention could potentially generate impact within and beyond PepsiCo’s operation

against these targets:

· It could serve to raise additional capital for the manufacturing of new or improved water-

related infrastructure in high-water-risk areas, which could contribute to improvements in

water-use efficiency, water reuse, and wastewater management of PepsiCo’s operations;

· Investing in new or improved water-related infrastructure in high-water-risk areas, which

contributes to improved water-use efficiency, water reuse, and wastewater management could

also serve to make more resources available to other users, and thus add to safeguarding

others who depend on water availability where PepsiCo operates;

· Leading the proposed intervention – and utilising an innovative financial mechanism like a

green bond – would allow PepsiCo to establish links with other stakeholders across sectors,

and across scales, and to facilitate collaborative planning over water infrastructure to mitigate

current and future water insecurity;

5

· The intervention could reinforce PepsiCo’s position as a global leader in sustainability, and

enable it to explore new mechanisms through which the corporation’s capacities could be

leveraged to address global sustainability challenges.

2. The existence of an identifiable water infrastructure challenge, which is specific (i.e. bounded) as

well as addressable within the scope of the project

Water insecurity is one of the most pressing issues in Mexico. The challenge is multifaceted,

including overexploitation, pollution, and a persistence of household poverty related to inadequate

access to water and sanitation (CONAGUA, 2014). In 2012, more that 10 million people in Mexico

lacked water sanitation and water supply. Under regional climate change scenarios, this water stress is

projected to increase. Reduced precipitation, and increased temperature is to be expected. It is

estimated that the variations in temperature and precipitation will negatively impact the water sector

in terms of water availability, stormwater flooding, and additional pressure on existing infrastructure.

Examining Mexico City, its water challenges are extensive. Climate change scenarios show an

increase of temperature (up to 1.5ºC in the short term and up to 2.25ºC in the long term), which,

according to the CDMX Resilience Strategy 2016, will result in extreme rainfall, causing stormwater

floods, landslides, and shocks to sewage systems. In addition, more frequent droughts are expected,

which would directly affect the Cutzamala resevoir – the main source of water supply for the

metropolitan area – resulting in further water stress.

According to the National Water Commission, CONAGUA (2014), the investment in water

infrastructure, still reliant on fiscal revenue to date, remains in deficit; addressing it will require an

80% increase in annual investments.

3. The water infrastructure problem poses a material challenge to the company, as well as to

suppliers, consumers, regulators, (local) governments, and communities

For the company to be incentivised to spearhead the proposed initiative, it is necessary to target a

market that is of material importance to PepsiCo’s current and/or future business interests.

Representing PepsiCo’s largest operation outside the U.S., as well as a key future growth market,

Mexico fulfils this criterion. At present, PepsiCo has 10 plants in Mexico, which are identified as

operating under water risk, which could be explored as potential pilot-study sites.

6

Table 1: Risks to PepsiCo’s plants in Mexico

City

Number

of

plants

Location of

PepsiCo’s plants

under water risk

Emerging points of tension Type of water

stress

Mexicali, Baja

California 2

Parque Industrial

PIMSA III

Demonstrations against arrival of

Constellation Brands Availability

Monterrey,

Nuevo León: 1 Nicolás de la Garza Dams under high pressure

Availability and

quality

Saltillo, Coahuila 1 Mileres Inadequate recovery of dams

resulting in water shortages

Availability and

quality

Fortín de las

Flores, Veracruz 1 San Marcial Deficient supply

Availability and

quality

Azcapotzalco,

Mexico City 3 Industrial Vallejo

Protests and street blockages about

recurring water rationing

Availability,

quality and

frequent floods

Gustavo A.

Madero, Mexico

City

1 Tres Estrellas Water rationing and floods

Availability,

quality and

frequent floods

Álvaro Obregón,

Mexico City 1 Olivar del Conde

Water shortage and recurrent water

rationing

Availability and

quality

4. There is a decisive role for the company to play in addressing the water infrastructure problem

which no other actor could play, deploying, for example, its operational expertise, financial

capabilities, access to capital, knowledge, and/or its prominent position as an employer, a buyer of

raw materials, a generator of GDP etc.

The relationship between business and society is changing. The 21st century corporation is expected

to go beyond a narrowly defined commitment of generating economic profit, and instead act as “‘a

positive force’ in contributing to worldwide social development goals” (Warhurst, 2005: 152). As

such, companies are “no longer conceptualized only as economic actors, but also as political actors”

(Brühl & Hofferberth, 2013: 353), and as a result, they “play important political and social roles in

making and implementing international and global public policies” (Forman & Segaar, 2006: 215).

Companies possess unique resources and capabilities which can be leveraged, and which enables

them to play a decisive role in addressing societal challenges, including water.

PepsiCo can bring value to this project in three distinct ways, making it well suited to lead an

intervention of this nature. Firstly, the company has a unique set of capabilities that it can deploy in

order to address the water infrastructure challenge. Having been embedded in the Mexican market at

the subsidiary level since 1907, the company has in-depth knowledge within in its local operational

team of cutting-edge opportunities, challenges, and risks in the Mexican market. It is consequently

well positioned to know what interventions are needed, and where they would have the greatest

impact.

Moreover, through its access to low-cost capital due to its high credit rating, the company has the

capability to bring in financial resources, by rising, for example, a green bond. As noted above, the

cost of borrowing for municipal water utilities is usually prohibitive, since it may result in the cost of

financing the project being higher than the return on the investment. Leveraging PepsiCo’s access to

cheap capital could lower the overall cost of the project, making it financially viable.

Secondly, PepsiCo also brings a wealth of experience and expertise, having already invested heavily

in water-related infrastructure in a number of its Mexican sites, such as the advanced wastewater

treatment plant implemented in the Sabritas Vallejo facility in Mexico City (part of PepsiCo and The

Nature Conservancy partnership for Positive Water Impact). Being able to bring that experience to the

7

table, including knowledge of how to execute similar projects in the most impactful manner, makes

the company a powerful implementer.

Finally, PepsiCo’s embeddedness and close relationships with a range of local actors makes it well

positioned to carry out this intervention – through its activities it is interconnected with, for example,

its suppliers, consumers, franchise partners, competitors, and local regulators. This connectedness

means that PepsiCo – and its local management team – has comprehensive knowledge of the needs

and requirements of a number of critical stakeholder groups; ranging from legal requirements to

community demands. Since this project seeks to identify interventions that could mitigate private, as

well as public, water insecurities, PepsiCo’s embeddedness – and the local knowledge that is

associated with building such connections – is critical.

5. There is a supporting network of existing stakeholders and initiatives in the field undertaking

related interventions

To enable project success, it is critical to have an existing network of initiatives and stakeholders to

learn from, and to form partnerships with. Conducting an analysis of the existing network of

stakeholders in Mexico demonstrate a multitude of connections. The findings are displayed in Figure

1. The figure illustrates the different stakeholders who in various ways work to address water issues,

and how these stakeholders – through formal partnerships or collective interventions – are connected

through projects.

PepsiCo Mexico sits at the centre of this map. The company is currently engaged in a number of

initiatives for mitigating water risks and issues, working closely with The Nature Conservancy, the

2030 Water Resources Group, and the Inter-American Development Bank. These relations are

displayed as direct links in the figure. By working with these actors, PepsiCo also have indirect

relationship with other organisational and institutional actors who are invested in solving similar

issues in Mexico, and who interact with PepsiCo’s partners. The figure displays the degree of

separation between PepsiCo and other actors; the stronger the colour, the stronger connection.

In the figure, the different stakeholders identified are grouped together in clusters classified by their

institutional role: International Organisations, Non-Governmental Organisations, Government,

Development Agencies, Financial Services, Development Banks, Private Banks, and Private

Corporations (listed as Competitors).

8

Figure 1: Stakeholder Map of Mexico

Each stakeholder is listed in Table 1, and the type of resources that it commonly contributes to similar

interventions is identified. Categorising this is useful, since it gives an indication of the type of

support that these stakeholders could provide to this intervention.

One resources identified is regulatory influence and policy-making capacity. One of the public

sector’s foremost responsibilities is to legislate and regulate aspects of social life. To navigate this

field of existing and proposed new regulations – particular in a complex field of water where

regulations often sit within different ministries and may not even be consisting – can be challenging;

cooperating with the public sector can give critical insight into the regulatory constraints and

opportunities. Another type of resource that many of these stakeholders could bring is knowledge

and experience. Many actors – for example NGOs – usually have long-standing experience of

working in these environments, and are usually familiar with local conditions and challenges. They

may also have experience of working with interventions of similar nature, and may thus be aware of

factors that enable project success. In addition to knowledge of local conditions, other actors – most

notably Banks and other Financial institutions – who have experience with the utilisation of

innovative financial mechanisms, could play a critical role in the implementation stage of this

project by assisting with the design of a suitable financial vehicle.

Legitimacy is identified as another critical resource that other stakeholders could contribute to this

intervention. Collaborating with other actors – NGOs, development agencies, and the UN – who are

respected and trusted by local communities could ease implementation, by mitigating possible tension

9

derived from PepsiCo leading this intervention. As shown in Figure 1, many of these stakeholders are

also well-connected. This is useful, as their existing networks could be leveraged to successfully

implement this intervention. Finally, depending on the type of financial vehicle that is designed for

the execution of this intervention, many of these actors could contribute with financial resources

having financed in the past similar projects or projects that followed a similar direction.

Table 2: Stakeholder Support in Mexico

Type Stakeholder Contributing resource

Public Sector CONAGUA

National Water Commission

Regulatory influence

Policy-making capacity

SEMERNAT

Ministry of Environment

Regulatory influence

Policy-making capacity

CDMX

Mexico City

Regulatory influence

Policy-making capacity

Development

Agency

GIZ

German Development Agency

Local knowledge & experience

Legitimacy

Contacts

BMZ

German Federal Ministry for Economic

Cooperation and Development

Financial resources

AFD

French Development Agency

Financial resources

Local knowledge & experience

NGO TNC

The Nature Conservancy

Local knowledge & experience

Legitimacy

Contacts

WWF

World Wide Fund for Nature

Local knowledge & experience

Legitimacy

International

Organisation

UNEP

United Nations Environment Programme

Legitimacy

Financial resources

2030 Water Resources Group Financial resources

Contacts

Bank HSBC Bank Financial resources

Experience of financial instruments

Grupo Financiero Banorte Financial resources

SEB

Skandinaviska Enskila Banken

Financial resources

Experience of financial instruments

ABM

Asociación de Bancos de México

Financial resources

Development

Banks

IFC

International Finance Corporation

Financial resources

Experience of financial instruments

FGRA

Gonzalo Río Arronte Fund

Financial resources

IDB

The Inter-American Development Bank

Financial resources

Experience of financial instruments

NAFINSA

Nacional Financiera

Financial resources

BANOBRAS

National Works and Public Services Bank

Financial resources

Experience of financial instruments

KfW Financial resources

Experience of financial instruments

Financial

Services

BMV

Mexican Stock Exchange

Contacts

Experience of financial instruments

Carbon Trust Contacts

Experience of financial instruments

MEXICO2

Carbon Trading Platform

Contacts

Experience of financial instruments

10

The resources that each stakeholder could contribute with (Table 1) depend not only on their

institutional nature, but also on the projects they works on, or contribute to. Table 2 therefore lists the

projects led by these stakeholders, and their project partners. Identifying the projects that have similar

agendas to the intervention that we are designing and developing, allows us to establish synergies and

critical success-factors, and more easily design a roadmap for action.

Table 3: Selected Projects

Stakeholders Project Partners

CONAGUA National Water Plan SEMARNAT

Strategic Projects for Drinking Water, Sewage

and Water Sanitation –2017

CDMX

Government

US$50m

Green bond CDMX

HSBC

GIZ and

UNEP

Emerging Markets Dialogue on (Green) Finance –

which has the Water Risks In Corporate Bond

Analysis Pilot Project

Swedish bank SEB

ABM and Banorte Bank

Urban-industrial environmental management II KfW and AFD

AFD and Kfw EUR 200m grant for implementing water sector

reform (2014)

CONAGUA

TNC Latin America Water Funds Partnership CONAGUA, FEMSA, IDB, GEF,

PepsiCo, The Coca-Cola Company,

FEMSA…

WWF Mexico Mexico Water Programme CONAGUA, FGRA, IDB, Coca-

Cola Mexico, HSBC, Telcel…

2030 Water

Resources Group

Toluca Multi-Stakeholder Platform Groupo Bimbo, Danone, Cuahtémoc

Brewery, FEMSA, Toluca Valley

Business Council, TNC.

Water Security Risk Integration Coca-Cola Company, Constellation

Brands, FEMSA, AbInBev,

Heineken, IFC, Nestle, ASIM

(Suez), Veolia, and TNC.

IFC IFC & Suez water development project Suez

IDB Latin American Water Funds Partnership and

AquaFund

PepsiCo

NAFINSA US$500m Green Bond for wind energy

BANOBRAS US $558.9m Sustainability Bond Banorte-IXE, HSBC, Santander

Rotoplas MXN2bn Sustainability Bond Banorte-IXE, HSBC, Santander

BMV Climate Bonds Working Group and MEXICO2

Carbon Trading Platform

SEMARNAT, INECC, UNEP,

British Embassy Mexico, SIF ICAP

Carbon Trust Carbon Trust Standard for Water Certification Private and public sector

6. Any proposed intervention should be aligned with the established public sector agenda, as well as

with the agenda of other potential partners

To facilitate an intervention, it is critical to have public sector support. In Mexico, the government has

been deeply involved in directing efforts to solve water related issues, which means that we can draw

support from them when developing this intervention. Mexico has a comprehensive National Water

Plan (2014-2018) which has six objectives: 1) integrated water management; 2) water security against

droughts and floods; 3) improving water supply, drinking water access, and sewerage and sanitation

services; 4) increasing technological capacities; 5) ensuring sustainable water availability for

economic activities such as industry; and 6) consolidating Mexico’s international involvement in

water issues. The intervention that we are proposing in collaboration with PepsiCo is aligned to the

main objectives, in particular 3 and 5, which have a strong focus on water infrastructure expansion,

11

coverage, efficiency, and innovation. In addition, CONAGUA has outlined a broader 2030 Water

Vision for Mexico (Figure 2):

Figure 2: Basic Components of the 2030 Water Plan

Source: CONAGUA, 2011: 34

However, the institutional framework that governs water in Mexico is complex, with numerous bodies

and legislations (often conflicting) governing water (Figure 3). Thus, before any action is taken, it

will be necessary to identify which body to coordinate with.

Figure 3: Key Bodies Governing Water in Mexico

Source: OECD, 2012a: 7

12

Insufficient investment is identified as one of the persisting problems for solving water infrastructure

challenges in Mexico. The National Water Plan has, therefore, announced reforms on the water

financial system, along with the reforms of the water legal framework (passed in 2016), and the public

water sector. Reforms are already being implemented to facilitate further investments in water

infrastructure. As part of the design of a Financial Water System (Sistema Financiero del Agua, SFA)

in Mexico, The Word Bank Water Partnership Program (WPP), along with CONAGUA, has

developed a framework proposal for the establishment of a financial subsystem pilot for public,

private and social institutions to invest in projects for the development and management of water

resources and systems. This aims to bring in new ways of financing water infrastructure and water

management projects, integrating both public and private funds.

Furthermore, Mexico City’s government, as part of its Climate Action Plan (PACCM) and its

Resilience Strategy 2016, has set goals on water infrastructure management, maintenance and

wastewater treatment. These objectives are set along with instruments for self-financing that aim to

increase the participation of all sectors, such as the Local System of Carbon Bonds Emission and the

Environmental Fund for Climate Change.

7. The capital market is well-developed, allowing financial mechanisms to be deployed to solve the

water infrastructure problem.

Executing this project will require the use of innovative financial mechanisms. In order to deploy such

mechanisms, the capital market in the country of implementation has to be robust, and with

institutions mature enough to facilitate the use of innovative mechanisms, such as green bonds.

Mexico fulfils this criterion.

For instance, Mexico has one of the most advanced sub-national bond markets in the developing

world, as a result of the introduction of regulations aimed at enhancing transparency in credit and

capital markets in the early 2000s, and the introduction of independently issued credit ratings for each

state. Amongst emerging economies, Mexico is at the forefront of the green bond market. At the time

of writing, 26 green bonds have been issued in Latin America; out of those, 8 have been issued in

Mexico. Mexico is the first country in the region where a green bond has been issued with the purpose

of addressing water issues; for other green bonds issued in the region, water has only constituted 5%.

Table 3 lists all green bonds issued in Mexico to date.

Table 4: Green Bonds issued in Mexico

Bond name Amount/

US$ m

Issue

date

Maturit

y Issuer Market Sector Rating

Banobras 225 31/08/17 2024 Development bank Local Multi-sector AAA/AAA

Grupo Rotoplas 34 30/06/17 2020 Corporate Local Water and

sanitation AA-/AA

Grupo Rotoplas 79 30/06/17 2027 Corporate Local Water and

sanitation AA-/AA

Mexico City 49 07/12/16 2021 Municipality Local Multi-sector Aaa/AAA

Mexico City

Airport Trust 1000 22/09/16 2046

State-owned/debt

issuing vehicle International Transport

Baa1/BBB+/B

BB+

Mexico City

Airport Trust 1000 22/09/16 2026

State-owned/debt

issuing vehicle International Transport

Baa1/BBB+/B

BB+

Nacional

Financiera 110 31/08/16 2023 Development bank Local

Energy

(wind and

power)

AAA

Nacional

Financiera 500 29/10/15 2020 Development bank International Energy A3/BBB+

Source: Author with data from CEPAL, 2017:24.

13

The need to attract further investments in water infrastructure, both in treatment and availability, has

made municipalities and BANOBRAS –a state-owned Mexican development bank– look for new

mechanisms to access low-cost capital. Inspiration was sought from the energy sector where

NAFINSA, a Mexican development bank, issued the first green bond in Mexico (the 3rd

in the region),

to finance wind energy projects in the country in 2015. The same bank issued a second bond in 2016.

Drawing on these experiences, Mexico City successfully raised the first municipal green bond in

Latin America in December 2016 to raise capital for projects relating to water and sanitation, public

transportation and energy efficiency. It raised US$50 million, with proceeds to be used to finance the

city’s climate action programme, including water infrastructure. The bond has a 5-year maturity and

yields 7%. The issue was 2.2 times oversubscribed, despite being issued during a period of intense

uncertainty in Mexico’s bond markets. The bond was rated AAA (Fitch).

The Sustainability Bond raised by BANOBRAS in September 2017 was the first sustainability bond

from a development bank, whose proceeds are to be invested in both environmental and social

projects. BANOBRAS has printed MXN10bn ($558.9m) in fixed (expected 7-year maturity) and

floating (expected 3-year maturity) notes – rated AAA (Moody’s and Fitch). Water and wastewater

management are one of the targeted projects for investment of this bond.

Moreover, Mexico has consolidated an array of initiatives to support the development of green

markets and green investments, such as the MEXICO2 platform, formed in 2014 as part of the

Mexican Stock Exchange Group (BMV), with the support of the Mexican Ministry of the

Environment, the U.K. Embassy in Mexico, the National Institute of Ecology and Climate Change,

the National Forestry Commission, the United Nations Environmental Programme and the SIF ICAP,

one of the leading interdealer broker in Mexico.

Looking at Latin America more broadly, corporations have played a leading role in issuing green

bonds. From 2014 to 2017, 11 out of the 26 green bonds were issued by corporates, in Peru (1), Brazil

(7), Argentina (1), and Mexico (2), respectively (CEPAL, 2017). Furthermore, Development banks

have issued 7 bonds in the same period. Before the Mexico City Bond, five green bonds in Latin

America had been already issued, seeking to raise capital for a range of projects including water: three

in Brazil, one in Costa Rica, and one in Colombia (CEPAL, 2017). However, for these bonds, water

and sanitation issues only represented 5% of the total.

Figure 4: Latin American Green Bonds by Type of Issuer (2014-2017)

Source: Author with data from CEPAL, 2017:24.

0

500

1000

1500

2000

2500

3000

3500

4000

2014 2015 2016 2017

Am

ou

nt/

US

D (

mil

lion

s)

Supranational

Development bank

State-owned/debt

issuing vehicle

Municipal

Bank

Dev. bank/debt

issuing vehicle

Corporate

Development bank

14

Deliverable #2: Risk and Opportunity Assessment

Undertaking an intervention of this nature entails risks as well as opportunities. This section outlines a

strategy for how to mitigate risk by minimising and acknowledging limitations, whilst maximising

opportunities and benefits by taking advantage of the strengths brought by PepsiCo’s capacities, and

by the design and methodology of the intervention.

PepsiCo is at the centre of this strategy. The reasons are twofold. Firstly, PepsiCo is the operator of

the intervention; it has the central role. Secondly, PepsiCo has the largest stake; it could use this

intervention as a demonstration for how a corporation can contribute to leading the sustainability and

water infrastructure agenda. Thus, whilst the project relies in PepsiCo’s institutional capacities,

networks, and resources, the wider objective is to demonstrate scalable impact, and set a new

sustainability agenda for corporations and their stake in building the world of the future.

The analysis presented in this document is based in the Strengths, Weakness, Opportunity, and Treats

(SWOT) framework to identify the main strategic lines. Table 4 describes the crossing of Strengths

and Opportunities; Table 5 describes the crossing of Limitations and Risks, and Table 6 describes the

matrix with the four strategic arenas.

Identify strengths and opportunities

The strengths of the PepsiCo are based on internal factors to the corporation and on the features that

makes the intervention – and its potential impact – stand out. The opportunities are external to the

corporation. They are circumstances that provide a unique chance to scale the ambition of the

intervention and to incorporate factors that will broaden its influence and chances of success. Table 1

shows the main strengths that could be used to take advantage of the existing opportunities, setting in

this way the first strategic line.

15

Table 5: PepsiCo strengths and opportunities in investing in sustainable water infrastructure

Strengths Opportunities Strategy: Use strengths to take

opportunities

Access to low-cost capital in

financial markets (S1)

Green bonds are benefiting of large

investment shares in LA and

Mexico

Help invest in sustainable water

infrastructure

Insufficient investment is one of the

main problems in infrastructure

provision

Close monitoring of water risk to

business and operations (S2)

Most water risks can be mitigated

or the long term through

partnerships addressing common

problems

Strong sustainability strategy:

Performance with Purpose,

Positive Water Impact (S3)

Become a leader in water

sustainability

Large experience in water-related

infrastructure, such as advanced

wastewater treatment plants, and

in water use reductions (S4)

Water infrastructure is a pressing

issue looking for solutions

Closeness to community through

operations and distribution (S5)

Close relationships with a range

of local actors in Mexico (S6)

Mexico is the biggest market to

PepsiCo

Operates in water distressed areas

(S10)

Strong reputation and brand

image (S7)

Water stewardship and water

concern is raising in business

One of the most diversified

companies, with several of the

most important brands in the

world (S8)

Market leadership both in

products but also in brand value

(S9)

CRS

Strong network of partners and

suppliers

Integrated solutions

[Fieldwork will inform this further]

16

Identify Risks to Project Success

The weakness and limitations of the project, as well as the strengths, are described based on internal

features of the project and the nature of the intervention. Similarly, the risks are external to the

research project but which occurrence could damage the success of the research. However, risks are

only so when the limitations are not mitigated. Table 6 describes how limitations relate to different

possible risks, and shows how minimising such limitations could reduce the chances of the project to

fall in such risks. This sets the second strategic line.

Table 6: Internal risks to PepsiCo undertaking the intervention

Weakness/ Limitations Risk Strategy: Minimise weakness to

reduce risk

Operates in water distressed areas Water shortages

Processes reliant on water

Low direct influence in reducing

water risk related to insufficient

infrastructure

Failing to engage the relevant

stakeholders for the project

Low experience in PPP with

municipalities (? Specific to the

intervention)

Use networks to access relevant

stakeholders, such as Tec de

Monterrey’s Water Hub, Centro

Del Agua, and hubs for

sustainable finance and water

infrastructure in Mexico

Close competition in similar

product segments High water stress in industrial parks Coordinate

Reputation is a pillar of

PepsiCo’s value Negative press, scandals

Partner with intermediaries that

will mediate the risk

Pioneering project / intervention

[Fieldwork will inform this further]

17

Develop conceptual mitigation plans

The final matrix of Strengths and Limitations and Opportunities and Risks (Table 3) show two more

crossings: Opportunities used to minimise limitations (OW), and Strengths used to minimise risks

(RS). In this final matrix, the four strategic lines are integrated which will ensure the success of

PepsiCo’s intervention, maximising opportunities and minimising risks.

Table 7: Matrix - Strategies to maximise opportunities and minimise risks

Strengths Weaknesses / Limitations

- Strong sustainability strategy:

Performance with Purpose

- Experience in water-related

infrastructure

- Access to low-cost capital in

financial markets

- Deep knowledge of Mexico

- Closeness to community

- Pioneering project

- Processes reliant on water

- Low direct influence in reducing

water risk

Dependence on partners and

stakeholders

- Pioneering project

- Operates in water distressed

areas

- Reputation

Opportunities Opportunity-Strength (OS)

Strategies

1. Invest in sustainable water

infrastructure

Opportunity-Weakness (OW)

Strategies

1. Take advantage of the

momentum on the rising

interest on water risk and

water infrastructure financing

to capture the attention of

relevant stakeholders.

- Boom of green bonds in Mexico

- Water stewardship and water

concern is raising in business

- Water infrastructure is a SDG

Risks Risk-Strength

(RS) Strategies

1. Use PepsiCo networks to

access stakeholders

2. Engage with problems that

are locally relevant

Risk-Weakness

(RW) Strategies

1. Use networks to access

relevant stakeholders, such as

Tec de Monterrey’s Water

Hub, Centro Del Agua, and

hubs for sustainable finance

and water infrastructure in

Mexico

- Water shortages

- High water stress in industrial

parks

- Failing to engage relevant

stakeholders

- Negative Press

[Fieldwork will inform this further]

18

Deliverable #3: The Business Case

Water flows through every aspect of PepsiCo’s operations; no water no business. Safeguarding water

security is thus of critical strategic importance to the company. This is particularly important in

markets like Mexico, which is not only severely water stressed, but also represents PepsiCo’s highest

net revenue outside the United States, and a key future growth market. Whilst ensuring water security

is a multifaceted task, part of the solution will encompass investing in new or improved water-related

infrastructure. This section sets out a framework for how to think of investments in water-related

infrastructure, and the business case for undertaking such investments.

Scope of Infrastructure Investments

Figure 5: Scope of Infrastructure Investments

Direct Usage

Investing in water-related infrastructure in direct operations includes investments in, for example,

technology that improves water efficiency and wastewater treatment. As part of its PwP agenda,

PepsiCo has ambitious targets in both of these areas:

To achieve a 25 percent improvement in water-use efficiency in direct operations, with a

focus on manufacturing operations in high water-risk areas;

To ensure that 100 percent of wastewater from operations meets PepsiCo’s standards for

protection of the environment.

As demonstrated from PepsiCo’s previous investments in such technologies, the benefits are ample.

For example, its instalment of Membrane Bioreactor Systems (MBS) in several facilities in Mexico –

a wastewater treatment technology that will also help to deliver greater water-use efficiency – has

allowed the company to improve its water use efficiency by over 40 percent since 2006. More

efficient water use does not only have direct benefits to the business, it could also have positive

environmental and social impact, which has reputational benefits and thus safeguards PepsiCo’s

social license to operate in the area.

Direct usage

Indirect usage

Advocacy

19

Indirect usage

Investing in water-related infrastructure in indirect operations includes investments in, for example,

improving water-use efficiency in agriculture, and water replenishment. Similarly to investments

in direct operations, PepsiCo’s PwP agenda include ambitious targets in these areas:

To improve water-use efficiency in our direct agricultural supply chain by 15 percent by

2025;

To replenish 100 percent of the water we consume in manufacturing operations located in

high-water risk areas by 2025, ensuring that replenishment takes place in the same watershed

where the water was extracted.

Achieving these objectives includes, for example, supplying farmers with more efficient irrigation

equipment, enabling them to move from flood irrigation to more efficient irrigation methods, such as

drip irrigation. In India, switching to drip irrigation has improved water-use efficiency by over 30

percent, whilst simultaneously improving yields. Achieving the replenishment objective implies

making investments in reforestation, wetlands rehabilitation, and aquifer recharge, as well as

designing projects that enable water for productive use, such as rainwater harvesting, dam

rehabilitation, and seasonal water storage.

Advocacy

Whilst investments in operations (whether direct or indirect) are critical, the greatest impact can be

achieved by initiating, or supporting, broader collective efforts to address water risk and mitigate

water insecurity. PepsiCo is already demonstrating significant leadership in this space, through its

leading role in initiatives like the Sustainable Agricultural Initiative (SAI), the 2030 Water Resources

Group, and BonSucro.

The Investment Case

Investing in water-related infrastructure could produce a range of positive impacts for a business,

operational as well as non-operational.

Operational benefits

Examples like the instalment of MBS systems in Mexico, or drip irrigation in India have

demonstrated, investments in water-related infrastructure could improve water-use efficiency, whilst

increasing production.

[Fieldwork will inform this further]

Non-operational benefits

The role of the corporation in society is changing. Consumer pressure on businesses to ‘act

responsibly’ and to be a part of solving complex societal challenges like water is rising. And, as

challenges – like water – are growing more severe, pressure is only likely to intensify. In today’s

world, the full value of a company cannot be captured on a balance sheet because ‘value’ also

constitutes intangible assets like ‘reputation’, ‘environmental performance’ and ‘brand trust’.

However, trust is difficult and time-consuming to build, and an ill-judged decision by a brand can

shrivel customer trust overnight, potentially resulting in immediate loss of market share. PepsiCo’s

recently withdrawn Kendall Jenner ad, which was pulled after less than 24 hours, do not only

demonstrate how swiftly consumers can turn against brands, but also the speed at which companies

are shamed.

20

If companies fail to meet societal expectations, it could thus negatively impact the value of the

company. However, the reverse is equally true; investing in projects that strengthen intangible assets

could contribute greatly to strengthening the overall value of the company. Mayer suggests that the

last 40 years has seen a complete reversal in the market value composition, in terms of tangible and

intangible assets, of corporations (Figure 6).

Figure 6: Inversion of Tangible and Intangible Assets

Source: (Mayer, 2016: 54)

In addition to investing in intangible assets, there are other (albeit related) non-operational benefits to

investing in water-related infrastructure. The literature that studies the motivations of the corporation

on adopting sustainable practices and green technology (see, for example, Bansal, Pratima; Roth,

2000) presents an analysis of the different motivations inside a corporation that could influence

ecological responsiveness: competitiveness, legitimation, and environmental responsibility. Each

motivation is tied to a context: issue salience and public opinion, field cohesion and transfer of

policies, and shareholders’ or directives’ ecological concern and values (see Figure 7).

Figure 7: An Advanced Model of Corporate Ecological Responsiveness

Source: (Bansal, Pratima; Roth, 2000, p. 729).

[Fieldwork will inform this further]

21

The Role of Stakeholder Relationships

As identified above, there are a wide number of stakeholders who are involved in addressing water

issues in Mexico (see Figure 1). Working collectively with some of these actors would allow PepsiCo

to achieve greater scale, and thus greater impact. Due to the nature of infrastructure projects, there are

two actors in particular that may be especially fruitful to partner with: municipalities and development

banks.

[Fieldwork will inform this further]

Below, we have sketched two types of multilateral interventions that PepsiCo could undertake, that

could align PepsiCo’s objectives with addressing wider developmental challenges. In the first

scenario, PepsiCo would work together with a municipality and another entity such as a development

bank to tackle bigger infrastructure needs beyond its own operational boundaries (Figure 8). Working

together with these actors would enable PepsiCo to make a larger contribution by aligning its

sustainability agenda with wider developmental water objectives in Mexico, while assuring the

continuation of their operations in terms of reducing uncertainty related to deep water risks.

Figure 8: Scenario 1

Under this scenario, PepsiCo could establish a partnership that would share the risk, whilst also

striving for greater impact. A development bank, in this case, could bring additional finance for large-

scale projects. In Mexico, the national development bank BANOBRAS plays a central role in

infrastructure investment in the country, and has consolidated experience in working with —and

financing— private infrastructure projects that fit the national development and sustainability goals.

For example, BANOBRAS, working with the National Water Council CONAGUA, financed 49% of

the Atotonilco wastewater treatment plant to supply water to inhabitants and the economy in Hidalgo

state, of water sourced from Mexico City and surroundings. In September 2017, this wastewater plant

was 99% completed. And to date is the largest of its kind in Latin America. BANOBRAS also has

experience with issuing green bonds. It issued its first Sustainability Bond in September 2017,

covering the financing of both green and social projects under the national development guidelines.

This was the first sustainable bond to be issued by a development bank in Latin America ($558.9

million US dollars in fixed and floating-rate notes). The bond was rated AAA both by Moody’s and

Fitch ratings.

22

Moreover, BANOBRAS is seeking to become an Accredited Entity of the UN Green Climate Fund,

for mobilising investment related to climate change projects in developing countries for low-emission

and resilient development. Its involvement in new financial mechanisms such as green bonds and its

commitment to sustainable development in the country, plus its large experience in working with

local governments, municipalities and agencies, could make BANOBRAS a good potential candidate

for a partnership of this sort.

The value for PepsiCo Mexico in this partnership and scenario of intervention is to establish a project

financed through a mechanism such as a green bond, which additionally could be backed by public

funds in its initial operational and maintenance costs. This will allow the project to run at a greater

scale to provide, for example, treated water to several PepsiCo facilities and to water utilities for local

supply. In this case, through the municipality partnership, PepsiCo could bid to supply a percentage of

the treated water to the local water utility. This type of intervention is similar to others that PepsiCo

has lead, such as the 2011 project in Jordan where PepsiCo partnered with the Ministry of Water and

Irrigation to build rain water harvesting dams and a wastewater treatment plant to produce irrigation

grade water.

In the second scenario, PepsiCo would lead an intervention with a municipality or state government

and a development bank, and in addition, invite other companies operating in the same area and that

face similar water risk to collaborate. Collectively, the group could issue a green bond to finance

investments in water-related infrastructure, or they could join individually by other mixed finance

mechanisms. Undertaking such an intervention would allow PepsiCo to make substantial contribution

to address challenges in watersheds or in industrial clusters, which could contribute greatly to achieve

objectives under wider developmental and sustainable agendas.

Figure 9: Scenario 2

Collaborating across sectors provides the potential to coordinate commercial interest with the

sustainable development objectives. With such collaboration, the financing of projects could be

focused in industrial parks or large industrial complexes in which PepsiCo facilities are situated and

facing water risk. Such collaboration could include building shared water treatment plants or shared

desalination plants to supply the local industry, for example in Mexicali, in Baja California state.

Moreover, this scenario could encompass the construction of additional infrastructure to ensure the

resilience and sustainable development of such industrial parks, the wellbeing of the employees, and

the surrounding community. This would allow PepsiCo to mitigate its water risk in a comprehensive

way, and to contribute and prepare its facilities and production towards a low-carbon and more

inclusive future.

23

Summary and Next Steps

This document has outlined the three first Project Deliverables associated with Objective #1 (to

design a framework that defines and quantifies the business necessity for corporate investment in

municipal infrastructure, where such investment drives cost-effective mitigation of water insecurity).

The document has provided an overview of the conditions that underwrite the success of this

intervention (Deliverable #1), offered strategies that could be followed that minimises project risks

and maximises opportunities (Deliverable #2), and demonstrated the value to PepsiCo of undertaking

this intervention in Mexico (Deliverable #3).

So far, the conclusions drawn are based on desk-based research. Whilst such research is vital in order

to lay a solid foundation, we have now reached a point where it is critical to conduct fieldwork to

develop concepts further, and fill gaps in our understanding. As a next step, therefore, we seek to

conduct interviews. Existing contacts that members of the project team holds with relevant

stakeholders in Mexico, including connections made by Dr Alex Money (PI of this project) during a

recent visit to Mexico arranged by PepsiCo will provide a strong basis for initial conversations.

Through these conversations, we will expand our network, and build new connections. Due to

geographical constraints, preliminary conversations will be arranged through Skype. These will be

held during the next few weeks (February/March 2018).

Critical stakeholders with whom we will seek to hold initial conversations include water professionals

at the Tecnológico de Monterrey (TEC), deputies at the Government of Mexico, and representatives

of PepsiCo LATAM. We also seek to speak to key stakeholders in Mexico’s Green Bond market,

including lead managers like HSBC, issuers like Rotoplas and BANOBRAS, and Lawyers like Cleary

Gottlieb.

Building on the initial conversations, we intend to arrange a fieldtrip to Mexico in the near future to

hold further interviews, and build a more comprehensive understanding of how the objectives and

deliverables of this project can be achieved.