April 17, 2008: 8:04 AM EDT
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Coke: The green thing

Coca-Cola CEO E. Neville Isdell is an environmentalist, but making the company sustainable is harder than it looks.

By Marc Gunther, senior writer

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New Coke: Isdell wants to reduce Coca-Cola's carbon footprint.

(Fortune) -- To save the planet, we've been told to stop burning coal, ditch our gas-guzzlers and switch our light bulbs to energy-efficient CFLs. Here's something else to worry about - the vending machine down the hall.

Yes, the vending machine. Vending machines and commercial coolers that keep drinks cold run around-the-clock, rely on inefficient compressors and, worst of all, use HFCs, a potent greenhouse gas. So when Greenpeace challenged the Coca-Cola Co (KO, Fortune 500). to get rid of conventional vending machines and coolers, the world's largest beverage company promised to develop replacements that are 40 to 50% more efficient and HFC-free.

Since then, Coke has invested $40 million in research and testing, published a 900-page technical study and organized a coalition of companies that sell cold drinks and ice cream, including Unilever, McDonald's and (gasp!) PepsiCo., to attack the problem. Last year, at the World Economic Forum in Davos, Coke declared victory: E. Neville Isdell, the company's chairman and CEO, and Gerd Leipold, who leads Greenpeace, unveiled a new, HFC-free, super-efficient vending machine. About 8,000 of the climate-friendly machines have been deployed, most to high-profile venues like Davos and the 2008 Summer Olympics in Beijing.

That's good for Coke because its reputation is so important. "The name on this building is the name on the bottle," Isdell says. But all of its hard work hasn't done much for the planet, at least not yet: Coca-Cola and its bottlers still have about 10 million old-style coolers and vending machines deployed in the 210 countries where its products are sold. That's because its bottlers, who are independently owned, don't want to pay extra for HFC-free units. And manufacturers, who have lots of capital sunk into their current production lines, have yet to produce them in bulk. "We have the technology and we know it works," Isdell says. "The problem is, the economic logic doesn't hang together."

This is not just a problem for Coke. Many big companies -- GE (GE, Fortune 500), Wal-Mart (WMT, Fortune 500), GM (GM, Fortune 500), IBM (IBM, Fortune 500), Citi (C, Fortune 500) and Procter & Gamble (PG, Fortune 500) -- say they want to help save the planet, and they mean it. But doing so is not as easy a changing a light bulb. Either their customers won't go along, or their distributors balk, or a clean technology they want to deploy is not ready for prime time. This story is about the gap between good intentions and meaningful results.

Examples abound: GE advertises coal-burning power plants that sequester carbon dioxide but it has yet to sell a single one. P&G says its customers don't want recycled stock in Bounty paper towels or Charmin toilet tissue because quality suffers. Despite its sophisticated efforts to save energy, Wal-Mart's greenhouse gas emissions are growing.

Why look at Coke? In part, because its commitment starts at the top. The 64-year-old Isdell fell in love with the outdoors as a child growing up in Africa. "I'm an early convert to the environmental movement," he told Fortune in an interview about all things green. He has had a keen sense of social justice since protesting apartheid as a student in Cape Town. More recently, the soft-spoken executive developed a passion for wildlife photography and gave up eating meat

Inside Coke, a team of a half dozen or so environmental advocates, led by a former Clinton administration official named Jeff Seabright, operate almost as an in-house NGO. They get high marks from outsiders who work with the company. "The inspiration and the perspiration are real," says Kert Davies, research director at Greenpeace USA.

Coke has good business reasons to take sustainability seriously. Its brand is all-important. It depends on clean water, a scarce resource. And the company has been stung by alleged misdeeds. Although no one ever proved a connection, a Coca-Cola bottling plant in Kerala, India, was shut down in 2004 after nearby wells went dry. That fed into a global anti-Coke campaign that caused about 20 colleges, including the University of Michigan and NYU, to suspend the sale of Coca-Cola products, albeit temporarily.

For all those reasons, Isdell has made the environment a touchstone of his four-year tenure as CEO. Coke's sales, profits and stock price have all grown since he came out of retirement to take over; he will turn the chief executive's job over to Muhtar Kent in July, and remain chairman for another year. Under Isdell, Coke has set bold environmental goals - to become "water neutral," to come up with a sustainable package for its beverages and to help curb climate change. Let's see how he's doing.

Trickle-down economics

Last winter, Isdell's desire to turn Coke green took him to the West African country of Mali for the first time. "That was country No. 134," he says. "They are one of the African countries that is improving pretty rapidly - good GDP growth, good governance."

In the capital of Bamako, Africa's fastest-growing city, some people blamed Coke for polluting a stream that ran by its bottling plant. Like most of the 900 plants in the Coca-Cola system, the Bamako bottling plant is independently owned. Its discharge met government standards, the stream was polluted anyway and the owner said he didn't want to spend the money for a new water treatment system.

"So, then, as a business, you're faced with two choices," Isdell says. "You can go on making that very defensive argument, or you can take a totally new approach."

Coke provided the bottler with money - the company won't say how much - to finance new equipment. Wastewater from the plant can now be used for irrigation. Beyond that, the company made a $280,000 grant that was matched by U.S. AID to improve the municipal water system. "We are now giving at least 22,000 people ... access to safe water, clean water in Bamako," Isdell says.

Becoming "water neutral," as defined by Coke, has several elements. First, it will use water more efficiently. Second, it has pledged that by 2010 all of the water discharged from its bottling plants will be clean enough to support agriculture or aquatic life. (Right now, about 85% meet that standard.) Finally, the company will replenish the world's supply of fresh water by an amount equal to all the water included in its drinks; it will do so by supporting healthy watersheds (the catchment areas that feed streams and rivers) and underwriting clean-water projects around the world.

No company is doing more than Coke to provide clean water to the world's poor (and not-so-poor) people. With the Gates Foundation and the global nonprofit CARE, Coke is delivering water-purification systems to dozens of schools in Kenya. With local partners, it is building more than 300 rainwater-harvesting structures to capture the monsoon rain in India which otherwise goes to waste. Last year, the company pledged $20 million to a partnership with World Wildlife Fund to improve the health of seven river basins, including the Yangtze, the Mekong, the Danube and a network of streams, lakes and rivers in the southeastern U.S., Coke's backyard. (Last fall, the drought in Georgia was so bad that the governor prayed for rain on the state capitol steps.)

Coke is also leading efforts to help poor villagers save water in the highlands of Guatemala. There, Coke and WWF, with local businesses and nonprofits, are paying villagers who agree to use farming practices that conserve water, or to switch to smaller and more efficient wood stoves so that fewer trees are cut down. What does that have to do with Coke? It's literally trickle-down economics, intended to increase the flow of water to its bottling plant downstream. Not incidentally, increasing the flow of fresh water helps preserve the Meso American reef, a vast but vulnerable hotbed of aquatic biodiversity off the coast.

To persuade its 300 bottlers to get with the program, Coca-Cola analyzed its water-related business risks for 23 different geographies. (It doesn't want a repeat of the India debacle.) It is also helping bottlers use less water - in 2006, the company used about 2.5 liters of water to produce a liter of product, down from the 3.1 liters that it took four years earlier. (Water that doesn't go into drinks is used for rinsing, cleaning, heating and cooling.) Since 2002, Coke's total water use has decreased by 5.6% while sales volume has increased by 14.6%.

Trash talk

Isdell's pleased with the company's progress. "I don't think we've scaled it up to a degree where the impact is major yet," he says, "but I think we've had a real

The trouble is, most people prefer clear plastic bottles with screw-on tops-and they are not currently sustainable. PET (polyethylene terephthalate) bottles account for nearly 50% of Coke's global volume, three times as much as aluminum. They're made from oil, a finite resource. And Coke recovers or reuses only about 10% of the PET that it puts into the market. Many countries don't allow recycled PET to be used in food packages.

When plastic winds up in landfills or, worse, becomes roadside litter, Coke gets blamed for the waste and pollution. Bottled water in particular has become an environmental flashpoint. Coke's Dasani is the No. 2 brand in the U.S., behind PepsiCo's Aquafina - but some offices and restaurants are banning both.

Again, Isdell has set an ambitious goal -to recycle or reuse 100% of its PET bottles. This will be harder to achieve than you might think. Unlike aluminum, PET can't be recycled indefinitely without discoloring. Right now, Isdell tells me, the company is able to make a new bottle with 50% recycled and 50% virgin PET, a big improvement from years ago. But better technology is needed. "I'm sure there are ways we can get to 60, 70, maybe 80 percent," he says. "Probably we'll never get to 100."

In the meantime, the company is looking for other uses for recycled PET: High-end boutiques like Fred Siegel of Beverly Hills sell T-shirts made from recycled plastic bottles, as part of a licensing deal with Coke, and recycled PET also makes its way into baseball caps and tote bags. Wal-Mart recently began promoting Coke T-Shirts made from recycled plastic with slogans like "Recycling is Hot" and "Make Your Plastic Fantastic."

T-shirts are fine, but Coca-Cola's bigger task is to build up the recycling infrastructure. The company is investing about $44 million to build the world's largest plastic-bottle-to-bottle recycling plant in Spartanburg, S.C., as well as in PET recycling facilities in Switzerland, Mexico, Austria, and the Philippines. Those plants are all intended to drive up demand for recycled bottle.

To generate supply, the company invested about $2 million in an innovative startup called RecycleBank. That's a small, fast-growing company that rewards customers-with coupons at retailers like Timberland and Green Mountain Coffee - to recycle more garbage and throw away less. "They partnered with RecycleBank when it was an idea, my cell phone, and laptop," says company founder Ron Gonen.

Meanwhile, Coke has scientists looking for packages that could replace PET. "We're excited about renewable plastics," says Scott Vitters, director of sustainable packaging. In theory, he says, you could make Coke bottles from corn stalks, sugar cane, even the orange peels from a Minute Maid plant. (Minute Maid is a Coca-Cola product.) But not anytime soon.

Cold drinks, warming planet

To enjoy an ice-cold Coke, do we need to heat up the planet?

The climate-change problem has been the toughest for Coca-Cola to crack. Isdell sees progress in the way the discussion around refrigeration and vending machines has changed. It used to be "around why would we want to do this," he says. "Now we're in the solutions business. That's a totally different paradigm."

It's hard to overstate the complexity of the problem facing Coke. Its system buys only about 1% of the world's compressors, so it needs to enlist backing from other buyers like McDonald's and Unilever. The refrigeration industry supply chain includes compressor manufacturers like Danfoss and Sanyo, component manufacturers like Norsk Hydro and Modine and system integrators like Frigoglass and Fuji, all of whom have investments in existing HFC technology. Commercial coolers are bigger, and they are opened more often than home refrigerators, so they need powerful coolants. HFC does an excellent job of trapping heat, but that's why it's such a problem when it is released into the atmosphere.

On energy-efficiency, Coke has made gains. Today, many of their two-door and bigger coolers are shipped with a proprietary energy-management system that adds about $25 to $30 to the cost of the cooler. Even though the energy savings go to the retailers, its bottlers are willing to foot that bill. "The economics are quite good," Isdell says. These "smart" vending machines learn to shut down when demand slackens-say, at night or on weekends for a vending machine in an office where people work during the day.

And the company has been able to remove HFC from the foam insulation of virtually all of the new coolers that enter the system. That's another step in the right direction, since it reduces demand for HFC; the less HFC that's made, the fewer the emissions during the manufacturing and disposal process.

But HFC is still being used as a coolant in nearly all coolers and vending machines because the alternative developed by Coke and others-a coolant that uses carbon dioxide-is more expensive. It requires retooling the industry, with no direct payback. "We've proven the efficiency, the reliability, the technical merits," says Bryan Jacob, a former Olympic weightlifter who has taken charge of Coke's efforts to curb its emissions, a program called eKOfreshment. "The key obstacle is cost." No one in the value chain is willing to foot the bill to fight climate change.

If nothing else, this demonstrates that companies - by themselves - can't solve the climate problem. Kert Davies of Greenpeace, which has worked with Coke for years, says government may have to intervene - perhaps by providing companies like Coke with economic rewards to stop using potent greenhouse gases. Climate legislation now pending in Congress would gradually phase out HFCs.

Isdell is not discouraged. "There's always a lag when you are rolling out a new technology," he says. Climate change, he says, is a challenging issue for Coke; unlike water or packaging, its relevance to the business is not as obvious. "We'll get there," he says. "We're only at the beginning."  To top of page