UK: Fuelling Responsibility - Corporate Social Responsibility Concerns In Biofuel Financing

Last Updated: 4 September 2008

This article, by Vince Heaney, was published in the June edition of International Trade Money magazine and quotes Head of Eversheds' Clean Energy and Sustainability Team, Michelle Thomas' views on corporate social responsibility concerns in biomass project financing.

The list of biofuel's detractors is now as long as the list of its former advocates. Before countries have had time to implement current government proposals to increase biofuels usage, pressure is growing to abandon the idea because of fears over their impact on global food supply. Malcolm Wicks, the UK's energy minister, recently said, "It would be ridiculous if we fill up our cars with 5-10 per cent of biofuels if the consequences are that somewhere else in the world people are not being fed." Jean Ziegler, a United Nations food expert, put it rather more forcefully, describing biofuels as a "crime against humanity". With the great white hope of alternative fuel technology fast becoming a pariah, what has been the impact on the financing of biofuel projects?

In some areas flows of funds into biofuels projects have indeed slowed. Investment in US corn-based ethanol projects, for example, has decreased over the last year – from $1.7bn in the first quarter of 2007 to $311m in the same period of 2008, according to New Energy Finance, a clean technology consultancy. Imperium and Renewable energy Group, two biodiesel companies, also pulled their IPOs from the US market in the first quarter. These trends, however, owe as much to the volatility of equity markets and the impact of the credit crunch as to any increase in environmental concerns about biofuels.

Similarly, when private equity firms, the Carlyle Group and Riverstone Holdings acquired Ensus, a UK-based bioethanol producer for about £250m in March 2007, there was some speculation in the press that environmental concerns had frustrated the company's intention to list on London's AIM. However, according to a Carlyle spokesperson, the issue was not environmental concerns, but one of market sentiment specifically investors' uncertainty surrounding the viability of the biofuel model following the underperformance of several AIM-listed ventures.

Outside the US, meanwhile, investment in biofuels projects has proved more resilient. Bolstered by projects in Brazil and new areas such as Russia, Mozambique, Thailand and Hungary, investment in biofuels in the first quarter of 2008 reached $3.1bn, a decrease of only 15 per cent compared with the same period a year ago.

Continued investment in biofuels projects, however, does not obscure the growing importance of the environmental debate. "Corporate social responsibility (CSR) concerns have been an issue in biofuel project financing for at least 9-10 months now. I have spoken to a number of institutions, some of whom are clients, about which alternative energy technologies they are interested in. For many of them biofuels are simply not an option at present," says Michelle Thomas, head of the clean energy and sustainability group at Eversheds, the international law firm.

Ms Thomas cites the example of a UK brand name company, involved in markets from telephony to transportation, which had been investing in biofuels in the US, but last year shifted its focus away from the alternative fuel because of concerns over sustainability. In a similar vein, Ms Thomas is aware of a number of biofuel companies using palm oil as feedstock, which, despite the fact that the crop was not grown on sensitive rainforest land, could not get either equity or debt financing in the UK. "It's a major issue, although more so on the equity side," she says. "Equity investors are not interested and that filters down into debt. If you can't raise the equity portion you won't be able to get the debt."

Part of the problem is that financing banks are caught at the sharp end of an unresolved scientific debate. For example a recent study published in the journal Atmospheric Chemistry and Physics by Noble prize-winning chemist Paul Crutzen calculated that cultivating some of the most commonly used biofuel crops releases twice the amount of nitrous oxide, a greenhouse gas, than previously thought – negating the benefits from not using fossil fuels. Other scientists, however, have criticised some of the study's central assumptions and an undisputed conclusion has yet to be reached.

Despite the differences of opinion on this contentious issue, the latest research does demonstrate the need to assess the wider impact of biofuels production and to consider the implications over the full life cycle of the crops. Merely looking at the differences in energy used from burning biofuels compared with fossil fuels misses the wider issues. In February, for example, a study by the Nature Conservancy and the University of Minnesota, published in Science magazine, calculated that clearing forests, grassland and peatland to plant crops for biofuels released more carbon than it saved.

"There is a vast volume of literature published on biofuels," says Gerrit Kruyswijk, Head of Energy Project Finance at Nedbank Capital, which focuses on power, oil, gas, petrochemicals and biofuels. "We continue to monitor the scientific findings and evidence and act accordingly.

Banks are embracing the holistic approach to biofuels within their CSR policies. Nedbank is one of about 60 of the world's major financial institutions that have signed up to the "Equator Principles" to ensure that the projects they finance are developed in a manner that is socially responsible and reflect sound environmental management practices. According to the Equator Principles Financial Institutions (EPFI), "Negative impacts on project-affected ecosystems and communities should be avoided where possible, and if these impacts are unavoidable, they should be reduced, mitigated and/or compensated for appropriately."

Mr Kruyswijk explains that for projects in emerging markets there are additional rules laid down by the International Finance Corporation's Social and Environmental Performance Standards and Guidelines. "Using the environmental and social guidelines [stated above], biofuel projects need to be assessed on their individual merits as they each have their own unique characteristics and associated risks," he says. "For example a project which requires the use of surplus agricultural feedstock or the rehabilitation of an existing brownfield site, is at first pass, likely to be more favourable to one in which large tracts of land require clearing and communities to be resettled."

HSBC, another signatory to the Equator Principles also takes a cautious case-bycase approach to financing biofuels businesses. "We are aware of the potential negative environmental and social impacts of this sector," says an HSBC spokesperson. "Some biofuels are much more energy intensive to produce than others and have wider impacts on biodiversity, water and communities."

Like Nedbank, HSBC also draws on a number of different sources to ensure that the projects it finances meet the necessary standards. "The potential sustainability risks involved in financing this sector are covered by our forestry and energy sector risk guidelines as well as our carbon finance strategy," says an HSBC spokesperson. "These form the basis for decision making and we also reference the work of the Roundtable on Sustainable Biofuels."

The situation is made more complex because, as the preceding discussion highlights, not all biofuel projects are created equal in terms of environmental impact. Where once, for example, concerns over using palm oil as a feedstock centred on the need to avoid clearing virgin rainforest for cultivation, account must now be taken of the moral and social issues raised by the food versus fuel debate. "Any project producing ethanol from a food crop will be far more difficult to finance than one using waste products or crops that can be grown on wasteland," says Ms Thomas.

The choice, however, is not always straightforward between using an agricultural feedstock or a waste product. Ensus, for example, uses wheat as the feedstock for its biofuel production, which might appear to be less than environmentally ideal, but the by-product from its process is a concentrated animal feed. Furthermore choice of feedstock must be considered in the context of a project's wider impact. "If you want to consider high-level aggregate criteria, such as the net energy gain or net CO2 sink a specific feedstock presents then there are differences between various feedstocks," says Nedbank's says Mr Kruyswijk. "However, these could be offset by other environmental and social impacts a specific project possesses."

There is a big difference, however, between only wishing to back socially responsible projects and backing away completely. Nedbank, for example, has not changed its attitude towards biofuels projects. "As a bank predominantly focused on Africa, we continue to believe in the vast agricultural potential the continent possesses and the opportunities specific biofuels projects present in terms of employment creation, economic contribution and energy security particularly in landlocked countries, says Mr Kruyswijk.

Banks are now, however, more acutely aware of the public's perception of their actions. This is understandable given the seriousness of the global food crisis, which has prompted rioting in a large number of developing countries, and the fact that the banking sector's reputation for sound financial judgement has taken a battering from the financial crisis. As Ms Thomas puts it, "in the wake of the credit crunch banks are not interested in any project that has an unacceptable degree of risk. Biofuels projects are getting financed, but they have to be squeaky clean on sustainability criteria."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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