We talk to Matthias Berninger, Head of Public Affairs, Science and Sustainability at Bayer, about the company’s approach to sustainability, energy transition and ESG ratings.
What is Bayer’s strategy with regard energy transition? What percentage of Bayer’s total energy consumption will come from renewable in the future?
Bayer has set itself clear decarbonisation targets, which have been approved by the Science Based Targets (SBT) Initiative. Our strategy is built on two pillars: We will reduce 42% of our carbon emissions by 2030. We are also working with our suppliers to reduce by 12% emission from the supplier side. The first part requires a switch to renewable energy sources. At present, 80% of Bayer’s energy consumption is in the US, Germany and Belgium and we see renewable energy sources growing in all three countries.
Despite the pro-fossil fuels policy of the Trump government, renewable energy in the US is growing and actually surpassed coal as an energy source for the first time this year. Harvesting renewable energy should become cheaper and easier in the next few years in the US. The US is where innovation is happening with renewable and this makes it more competitive. This applies to wind, solar and biogas. Biogas should replace a lot of shale gas in the next few years.
The other issue is that carbon is a by product in some of our production processes that produce immediate emissions. For example, we have this problem in crops with phosphate which we need to reduce. This will be done through innovation and the development of alternative products. We are also looking at increasing the efficiency of our energy use; everything else needs to be offset. All this combined will lead to decarbonisation by 2030 so we will be climate neutral by then.
What are the main climate risks with Bayer for investors? Will we see a universal metric for corporate climate risk anytime soon and where might it come from?
The problem with regards climate risk for Bayer is very much with agricultural production. The most important compound in agriculture is water as this affects yields and is important for the herbicide business. Under dry conditions there is less demand for pesticide and herbicides and some are not needed at all. Another risk is adverse weather condition such as storms which lead to crop losses and insects such as locusts which destroy crops. These are all climate related risks for us but they are also a business opportunity as they will produce demand for new products which can make crops more resilient to these problems. Finally, we also have operational risk such as chemical production which can be adversely affected by weather conditions.
As for a metric for climate risk, the problem is that companies have little incentive to develop one as it’s a risk mostly on the downside, although pressure is growing from investors for a risk metric. For service providers this is an important future opportunity.
How much importance do you attach to ESG ratings?
It’s a matter of the good, bad, and the ugly. ESG ratings are good because they help companies to measure the sustainability impact of their business and for allowing the comparison of companies and sectors in more objective way. Ratings also help in the process of holding companies to account in ensuring they behave in the right way. Also, by incorporating controversies around products, for example, it means companies have to address the issue and this has to be a good thing.
As for the bad, ESG ratings from different providers are not as converging as they should be. Different agencies have different priorities and methodologies and this can be a problem. This is also a challenge for investors. Not everybody is measuring the same thing and when they are, it is in a different way. They cannot all be an accurate measurement of a business’s sustainability.
There is still too much that is qualitative and not enough in quantitative analysis in the production of ESG ratings. The amount that a company invests in R&D is not measured very well even if the projects are aimed at solving some of our biggest sustainability problems. There is too much box checking and too much looking backwards and not enough forward looking analysis. I also find that there is a problem with over indexing controversy and under indexing actual sustainability impacts. There is basically too much focus on corporate social responsibility and not enough on impact. You have to look at what companies are doing the most to lead us to a sustainable future and this isn’t reflected in ratings.
ESG ratings are too human-centric and do not use enough quants based analysis of sustainability performance. Recently, the Wall Street Journal published a list of rankings that were largely quant driven. This highlighted the discrepancies between this approach and the ratings produced by agencies. A lot of companies such as Unilever were not even in the top 100 of the WSJ study even though they are ranked highly by agencies. There is no doubt that artificial intelligence will become a big part of ESG ratings and metrics and this will go some way to alleviating this problem.
Finally, another problem with ratings agencies is their business model that not only rates you but then recommends a service provider to improve your rating. This conflict of interest, if you like, does not contribute towards the impartiality of ratings.
Do you think Bayer’s ESG ratings are an accurate reflection of the company’s sustainability performance?
It’s a mixed bag. The amount of controversy that we produce at Bayer is definitely something we need to address. To red flag some of our mistakes is fine as well as the litigation issues we have at the moment. On the other hand, when I talk to agencies they say that Genetically Modified Organisms (GMO) is a problem. But not only is there no science supporting this claim, we need to use innovation in order to solve some of the biggest problems in food and agricultural production. By penalising GMO they are reducing the possibilities to solve these problems: To red flag GMO just because it is controversial is ridiculous to me.
Has the Monsanto Roundup lawsuits had any impact on Bayers’s sustainability credentials?
With regards the ongoing product liability litigation in the US, all the studies I have looked at show that there is no scientific evidence glyphosate causes Non-Hodgkin lymphoma.
The active ingredient in Roundup is glyphosate. While glyphosate will continue to play an important role in agriculture and in Bayer’s portfolio, the company is committed to offering more choices for growers and will invest approximately 5 billion euros in additional methods to combat weeds over the next decade.
There is a lot of non-scientific debate about sustainability in agriculture that is inaccurate. Moreover, genuine innovation that looks to increase sustainability is not registered in ESG ratings. The issue is that if we want to make agriculture carbon positive then we need to move into farming practices that will lead to no till farming. No till farming requires herbicides otherwise you have to plough and this uses a lot of energy and produces carbon emissions. At the moment, the US and Brazil have made large advances in no till agriculture. We should see more non till farming in Europe by the end of the decade or there should at least be significant inroads which will make a major contribution to reducing carbon emission in European agriculture. Finding a way for global farming to go ‘no till’ is a major challenge that will have a significant impact on reducing CO2 emission if a solution can be found soon.
Another area of innovation is rice that can be grown on dry land so avoiding rice paddies that produce 6% of global methane emissions. On dry land rice that uses herbicides will massively reduce these emissions.