Pesticides: Efficiency Booster or Biodiversity Killer?

By Benjamin Gränicher, Sustainable Investment Analyst at J. Safra Sarasin Sustainable Asset Management

The total value created by our planet’s ecosystem is estimated to be around 33 trillion dollars, equivalent to the combined GDP of the US and China. Yet around one million plants and species are currently threatened by extinction. This biodiversity loss also means that we lose some services provided by nature, such as the pollination of crops by bees.

Pesticide-intensive agriculture is a major contributor to biodiversity’s destruction, but it also provides efficiency gains in food production. How do the costs and benefits of pesticide-use weigh up, and how should investors consider these factors in their portfolios?

Pesticides Improve Efficiency, but at What Cost?

Approximately 4.1 million tonnes of pesticide are used every year worldwide. Farming accounts for about two thirds of this, while industry and households make up the rest. Around 45 percent of annual crop production is lost through pests and disease, and so pesticides are used to minimize these losses.

Moreover, around half the planet’s habitable land today is used for food production. Expanding this further would lead to even greater biodiversity loss and exacerbate the problems of climate change. The Swiss agricultural research institute Agroscope cites a report estimating that a complete switch to organic farming would reduce crop yields by some 15 percent.

Unfortunately pesticides also come with side effects. Depending on their composition, pesticides can harm beneficial soil organisms such as insects, worms or mycelium (beneficial fungus). Their destruction removes an important source of food for birds and other species, and some even harm the central nervous systems of useful insects like bees.

Pesticides can also be absorbed by plants or can run off from fields into lakes and rivers, disrupting their sensitive ecosystems, and leech into the groundwater. As such, there are many ways that pesticides can end up in the human food chain. The reported negative health effects include various types of cancers, respiratory problems and reduced fertility. The question is whether the negative impacts on human health and the ecosystem cancel out the economic benefits of the higher yields provided by pesticides.

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Sustainable Farming Methods are on the Menu

Nowadays experts are advocating integrated pest control, an approach where pesticides are used only as a last resort after trying to prevent pest infestations in the first place. Organic farmers are already using various pest management technologies, such as crop rotation or intercropping.

Correct irrigation techniques can also reduce fungal infection. Agroscope is currently researching and testing forecasting and warning systems to reduce pesticide use even further. However, most of these measures require technical knowledge of the interactions between different plants and more intensive use of machinery or human labour.

Changing Regulations and Consumer Habits Present Both Risks and Rewards

Investors may be exposed to both risks and opportunities, arising from changing consumer behaviour, stricter regulations, or if companies adopt new and more sustainable solutions. Last year, for example, the EU set a 50 percent reduction target for pesticide use by 2030.

In Switzerland, two referendums are due to be held on the improvement of water quality and the outright banning of pesticides. These decisions threaten the revenues of big producers such as Bayer or DuPont. Even without a complete ban, however, profits could come under pressure as stricter regulation means higher spending on research and development for new products, and compliance.

At the same time, the ongoing shift to organic farming methods also produces winners, as it provides a tailwind for makers of biocides or innovative farming machinery. The use of novel technologies to monitor and predict pests will also increase. When analyzing investments, we focus on companies offering solutions to reduce pesticide use in agriculture.

For example, Kubota is a manufacturer of agricultural machinery for precision farming, where soil variations are accurately mapped to ensure more effectively targeted distribution of seeds and fertilizers, as well as the reduction or elimination of pesticides. In recent years this has helped Kubota to grow its revenues.

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