Mexico's FEMSA finds ESG cred in its business with Coca-Cola

How a Mexican bottler and convenience store owner became a leader in climate change and ESG

By Michael Molinski

(Michael Molinski is a senior economist at Trendline Economics. He’s worked for Fidelity, Charles Schwab and Wells Fargo, and previously as a foreign correspondent and editor for Bloomberg News and MarketWatch.) 

MEXICO CITY (Callaway Climate Insights) — Mexican conglomerate FEMSA and its subsidiary, Coca-Cola FEMSA, are making a dent on climate change and at the same time finding inroads to the lucrative environmental, social, and governance (ESG) investing business.

Over the past year, both companies have been admitted to the S&P/BMV Total Mexico ESG Index, which tracks companies that stand out in the areas of environmental, social and governance policies. Plus, FEMSA is now the fourth largest holding of the MSCI EM Latin America Leaders Index as of Dec. 31, making it the highest ranking non-financial company on the index and one of only two non-Brazilian companies to make the top 10 constituents on the MSCI index.

S&P and MSCI indexes are used by many fund managers and other investors to make investment decisions about a company’s strengths in terms of ESG.

So how did FEMSA, whose name is Fomento Economico Mexicano (FMX) and Coca-Cola FEMSA (KOF), gain admission to the well-respected group of ESG companies?

Three ways: 1. By publicly announcing its adherence to the Paris agreement to reduce carbon emissions. 2. By closely paying attention and striving to meet ESG requirements by watchdogs like S&P and MSCI. 3. By selling its beer business of Dos Equis, Tecate and Sol to Heineken in 2010.

FEMSA joins Paris Agreement

In joining the Paris Agreement to reduce its carbon emissions and meet targets, FEMSA became the first company to do so and only the third company in Latin America. Coca-Cola FEMSA is the largest bottler of Coca-Cola in the world by volume, distributing its products throughout Latin America and to the United States and Canada.

“Sustainability is part of the DNA and it’s key in the decision-making processes throughout Coca-Cola FEMSA. Our goal is to become a reference in the beverage industry by reducing our GHG emissions and collaborating with our stakeholders to ensure they reduce their own,” said John Santa Maria Otazua, Coca-Cola FEMSA’s CEO.

Coca-Cola FEMSA agreed to:

  • Reduce absolute greenhouse gas (GHG) emissions from its operations by 50% compared to the 2015 baseline.

  • Reduce absolute GHG emissions from the value chain by 20% compared to the 2015 baseline.

  • Achieve 100% renewable electricity in its operations.

Already, the company supplies 70% of the electricity of its bottling plants with clean sources; improved its energy efficiency by 46% and reduced the CO₂ emissions from its manufacturing plants by 12.6% in comparison to its 2015 baseline, the company said.

Paying attention to ESG

Indeed, manufacturing industries and beverage companies are not the first that come to mind when searching for ESG companies. One might ask: Don’t they just make sugar water? And plastic bottles? What’s good about that? More frequent you’re likely to find finance and tech companies high on the list of ESG companies.

Yet Atlanta-based Coca-Cola (KO) is the No. 15 holding on the Xtrackers MSCI USA ESG Leaders Equity ETF (USSG). It has made efforts to reduce its water usage and it has made strides in recycling its plastic bottles in the U.S.

But Coke FEMSA continues to use predominantly glass bottles instead of plastics, and for the first time in five years, FEMSA received an “A” from MSCI for its ESG policies.

“The inclusion of FEMSA and Coca-Cola FEMSA in the S&P/BMV Total Mexico ESG Index was the result of the development of corporate policies, the establishment of a code of ethics and sustainability activities, projects and initiatives that contribute to the achievement of the UN’s Sustainable Development Goals (SDG),” the company said in a statement.

The “A” came from reducing its use of water, improving its packaging and waste, and for workers’ health and safety, and to a lesser extent for cutting its carbon footprint, nutrition and health, and for its corporate behavior. FEMSA received negative marks from MSCI in the areas of corporate governance and product safety and quality.

Equity analysts give Coke FEMSA an average “Buy” rating as of Jan. 22, based on 18 analyst recommendations according to MarketWatch. But there are still some risks, especially as it relates to Covid.

“It remains beleaguered by factors largely outside of its control,” wrote Nicholas Johnson of Morningstar in a letter to investors in November 2020. “Runaway inflation and falling disposable incomes on markets like Argentina and Brazil make it increasingly difficult to maintain appropriate economics while delivering affordability to its consumers… With Covid-19 exacerbating social and economic tensions, it is not implausible that disruption could break out in some of its operating countries in the months ahead.”

Getting rid of its beer business

When FEMSA sold its beer business to Heineken 11 years ago, that left only the coke bottling company and a tiny chain of convenience stores called OXXO, which also sells gas. Oh, that sale also included a minority share in Heineken.

Times have changed. Those 11 years have allowed FEMSA to concentrate on its bottling business and on expanding OXXO. It has also allowed it to court ESG investors by not having the stigma of a beer company.

That’s not to say that a beer company can’t get a high ESG rating. To be sure, many indexes rate companies on ESG in relation to their peers. But by looking up five of the largest ESG funds showed that not one of them had a top-10 holding from the Beer, Wine and Spirits industry in their portfolios.

The iShares Latin America 40 exchange-trade fund (ILF) as of 12/31/20 included FEMSA as one of its top-10 holdings. While not strictly an ESG fund, the owner of the fund, BlackRock (BLK), became the first major fund manager in the world that it would begin to incorporate ESG risks as a directive. ILF is the world’s largest Latin America ETF.