Potential In The Pipeline: Socially responsible investors anticipate opportunities in next-generation biofuels

Source:  Jerilyn Klein Bier, Financial Advisor, December 2011.  Biofuels buzz has gotten louder in recent months.

The U.S. Departments of Agriculture, Energy and Defense (through the Navy) announced a three-year $510 million joint investment to support the development of drop-in biofuels for aviation and marine applications. The USDA pledged $136 million to support development of advanced biofuels made from non-food crops. Many idled biodiesel plants are humming again with the return of a federal tax credit, and several European airlines have fueled commercial flights with biodiesel.

A number of biofuel-related IPOs have also been launched over the past 20 months including Solazyme, KiOR, Gevo, Amyris and Codexis. A handful of others are in the IPO queue, says Jim Lane, editor and publisher of Biofuels Digest, a Web site and daily online newsletter.

“The fields to wheels universe is big,” says Lane, who estimates that in addition to large and small public players, some 1,200 private companies are also doing some sort of bio-energy work.

But do biofuels carry hope or just hype for a cleaner, greener environment? How far out are we from seeing them used on a large-scale basis? And what opportunities are available for investors in this volatile sector? (Solazyme, Gevo and Amyris were trading approximately 55% to 72% below their 52-week highs as of early November.)

First-generation biofuels, such as ethanol made from corn and sugarcane and biodiesel from palm oil, have had their share of skeptics. “The real problem is with the food-versus-fuel question. How do we feed 9 billion people by 2050?” asks Ellen Kennedy, a senior sustainability analyst with Calvert Investments.

It’s not just the socially responsible investing community that’s upset with the upward pressure corn-based ethanol production has exerted on corn prices, demand for cropland, the cost of animal feed, and, ultimately, the prices of other farm commodities. Roughly 40% of this year’s U.S. corn crop will be used to make ethanol and its byproducts, estimates the USDA.

Food concerns also extend to palm oil, which Kennedy notes is a staple in the Asian diet and is being used as a substitute for trans fats. She’s concerned, too, about the life cycle effects related to biofuels. For example, atrazine, a pesticide commonly used in corn production, has been found in Midwest drinking water supplies.

Ben Caldecott is the head of policy for London-based Climate Change Capital Ltd., an investment manager and advisory group. The firm seeks investment opportunities in companies that will emerge and thrive as the world economy accommodates lower carbon footprints. Caldecott worries about distortion in food markets and destruction of tropical forests for palm oil production. “This is the scandal of our age. How’s that going to save the planet?” he asks. (Kennedy notes that palm oil certified by the multi-stakeholder Roundtable on Sustainable Palm Oil offers greater environmental and human rights assurances.)

“Overall, [current commercial biofuels] have been a negative in terms of climate change,” says Jonathan Naimon, the founder and managing partner of Light Green Advisors (LGA), a Seattle-based asset manager focusing on environmental sustainability investing. Producing corn-based ethanol can require more fossil energy than the energy yielded by ethanol, according to studies he cited from Cornell and MIT.

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1 thought on “Potential In The Pipeline: Socially responsible investors anticipate opportunities in next-generation biofuels

  1. This article seemed to lack research from the Bio Fuels Industry. Jerilyn comments that ethanol production is causing an increase in food prices because it is using up an increasing amount of the corn. Research has shown that packaging costs and transportation of the product to the consumer has been responsible for most of the price increases. In one box of Corn Flakes the raw material of corn used is responsible for only $0.03 (cents) of the cost increase. She expresses a concern of how we are going to feed people in the future. It should be noted that the corn used to make ehtanol is a feed source for only the livestock industry. A “food source” animal gains weight from the protein in its feed. In the process of making ethanol the starch is the only part used to ferment the ethanol. The protein, called Dried Distillers Grain, is returned to the food chain as a high quality product for livestock production. It also happens to be more effecient for feeding to animals. It should also be noted that in 1980 farmers havested about 75 million acres of corn or 6.7 Billion bushels. Today they plant about 80 million acres and harvest about 12.5 billion bushels. By 2025 they expect the same number of acres to produce over 19.0 million bushels of corn. Finally, the research she referenced by Cornell and MIT are 20 years out of date. The industry is quite efficient today and has net gain in BTU’s produced. All of this does not give credit to the ingenuity of other products the industry is producing. Item like “biodegradalbe plastic from corn”, pharmaceutical packaging that is digestable from corn, oils and gases that are recovered from the process.


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