Listen to the full interview with Werner Baumann below, as well as the analysis from Fidelity’s investment team. You can subscribe to the podcast on your mobile device by following this link or search ‘Fidelity Answers’ in your podcast app.
Without the endorsement of society, we don't have a license to operate. Full stop. We can not simply sit here and say we know what's right for you, customers, society and get out of the way. What we have to do is we have to be in constant dialogue […] It's not said that that always works. We've seen that with [genetically modified organisms], where there's no acceptance in most European markets and that is OK for us. We would love it to be different. We have a different perspective, but we do accept it.
Bayer, a German multinational company working across pharmaceuticals and crop science, finds itself immersed in one of today’s great sustainability dilemmas: how do you grow food for a planet of 8 billion people while not degrading every last patch of land in the process? The societal need for widespread crop production at accessible cost sits uncomfortably alongside the environmental damage that intensive farming causes.
Bayer started life as a drugs business in the middle of the 19th century. It bought agrochemicals company Monsanto in 2019, and since then has faced a string of lawsuits related to the alleged carcinogenic properties of a weedkiller sold by Monsanto called Roundup, which contains the controversial herbicide glyphosate.
Bayer’s dilemma appears to pit the environmental strand of ESG (environmental, social and governance) investing against the social.
But the company’s chief executive, Werner Baumann, sees no need to make a trade off between the two. He believes in investing in technologies to deliver greater yield at lower environmental cost. That’s seen the business develop from volume-based to value-based: “We are progressively moving away from being a company that is an input provider towards being one that provides farmers with tailored solutions, which means we can help farmers pick the right seed variety in order to optimise their yields and the quality.”
Volume to value
Technology can help improve yields. But this can lead to further trade offs: “Everything has two sides”, says Fidelity chemicals analyst Panpan Xiao. “Bayer was developing some of the products [used in intensive farming], for example, GMO (genetically modified organisms). That greatly helps with improving yields. But then in the meantime, it's widely associated with the extinction of some animal species. So that is definitely one of the trade offs the company is facing.”
Food security vs biodiversity
Our products are driving better outcomes for farmers and society in a world where we have a growing population that needs to be fed, and at the same time we have a planet that we need to bring back into balance.
For Baumann, the need for investment is clear. The quality of produce filters down to greater output for his clients, primarily farmers. This is the goal: “The farmer is willing to pay for better outcomes. That’s because the farmer will be paid on better outcomes, in terms of quality and yields.”
The task for Bayer is to hone its technology to be as efficient and environmentally-friendly as possible. It’s a delicate balancing act. Dmitry Solomakhin, a Fidelity portfolio manager, puts the issue like this: “You definitely need to drive yield. If you want to feed the world, there’s no other way around that because arable land is in limited supply.
“[The environmental impact of certain crops like GMOs] absolutely does worry me. But then you look at the situation and if there is a better technology that addresses it or helps improve this potential negative impact, then I'm sure [Bayer] will be on it. In terms of the trade offs, yield is what's going to drive the business.”
Court of public opinion
Fidelity: What’s your personal trade off?
Baumann: It may surprise you, but I'm probably one of the very few chief executives who doesn’t have a company car. I find it completely useless. I think it's much better in a sharing economy to share infrastructure, which also means sharing drivers.
Fidelity: What do you see as the biggest challenge facing governments over the next five years and what’s one solution you might have?
Baumann: First of all, governments have to figure out how to get out of their spending frenzy, so they can get their state finances in order. Secondly, governments would be well-advised to look at things which are factually the right thing to do, rather than politically the right thing to do. Having better informed, higher quality decisions by the political establishment would be a great help towards solving some of the major problems that we currently face.
Fidelity: If we were to get together again in five or ten years’ time and look back on what's happened, what would be your prediction about the state of the world?
Baumann: It will be a little bit more bipolar. [Much depends on] what role Europe has hopefully found. Europe may become more self-determined in terms of its role, a role which does not exclusively cater to what the Americans want us to be. How exactly that is going to shape up, I don't know. I hope it's going to bring us back to a more peaceful and multilateral world that we have lost over the last three or four years, unfortunately.
This interview took place in November 2022.