Biofuels and Deforestation: A CSR/ESG Cautionary Tale

Biofuels and Deforestation: A CSR/ESG Cautionary Tale

The Republic of France, in March 2019, decided that it would no longer consider fuel made from palm oil to be a “biofuel,” effective as of January 2020. So that  redefinition is now in effect. Meanwhile, the EU recently set tariffs on palm oil coming in from Indonesia or Malaysia: tariffs motivated, like the French action, by concerns over deforestation.

Palm oil has become a cautionary tale for corporate social responsibility, because this is an instance in which an asset once considered important in the move toward a sustainable post-fossil-fuel economy has come to be seen, in many quarters at least, as in fact a liability.

No Single Metric

The needs of the environment cannot be measured by any single metric. You may say “It will be good if transportation used lesser quantities of fossil fuels.” But if that is your single metric, then biofuel looks good, and in France or elsewhere palm oil is “bio.” What is more, palm oil looks better than many biofuels because it is more concentrated: you get more energy bang per acre out of palms than you get from many other renewable diesel sources.

Palm oil is the world’s most popular vegetable oil. Measured by global consumption, it constitutes one third of the vegetable oil market. Global demand for it is greater than 70 million tons a year, and this is expected to double or more by 2050.

Energy is only one of its uses. Food preparation, beauty products and wound salve are some of the others. But it is palm oil’s utility as a biofuel that has triggered its growth in recent years. Indonesia is the world’s largest producer and roughly 40% of the palm oil that Indonesia exports to Europe was used for biodiesel as of early 2018.

There are corporations that were once beloved of ESG investors that have fallen out of favor because the balance of opinion on palm oil has shifted. For example, Neste Oyj, the oil refining company headquartered in Finland and 50.1% state-owned, boasts on its website that its “MY Renewable Diesel” is “made from 100% renewable raw materials [and] results in 50?90% lower greenhouse gas (GHG) emissions over the fuel’s lifecycle when compared with traditional fossil diesel.”

But in January 2019, the London based watchdog group Biofuelwatch charged that “Neste’s sourcing and sustainability policies ignore all indirect impacts,” and that if one takes into account “the greenhouse gas emissions from indirect land use change,” Neste’s aviation fuel in particular is “three times as bad for the climate as the fossil fuel it replaces, as confirmed in data produced for European Commission.”

Biofuelwatch also charged that some of the palm oil employed by Nests is obtained in violation of the laws of the exporting countries. Specifically, some of the palm oil that ended up in its refinery in Riau, Sumatra was may well have come from the Tesso Nilo National Park, in Sumatra, Indonesia, and may have contributed to the deforestation in that protected area, despite the fact that the Riau facilities had certification from the Roundtable on Sustainable Palm Oil.

JetBlue and San Francisco

On Jan. 6, the budget carrier JetBlue became the latest commercial flier to announce that it will start flying planes on “sustainable aviation fuel” (SAF) on flights out of San Francisco, beginning mid-2020. JetBlue will be buying the fuel from Neste.

Indeed, Neste may have survived the pause in its growth caused by the revelations of a year ago and may once again be turning into a “hot stock,” as the Moral Money column in the Financial Times recently called it. The success of this depends on the support of airline passengers and the institutions for which they work, which have made very public commitments on environmental and climate-related issues. This might be enough impetus to fuel a continuing demand for aviation-friendly biofuels.

As it happens, the amount of SAF being produced today is tiny. Barclays says that it represents only 1% of OECD jet fuel demand. There is a lot of room for growth.

Going forward, then, there will also be a lot of time for funds and institutions to wrestle with the question of whether am issuer of stocks and bonds with a bad deforestation record might nonetheless earn their loyalty as part of the necessary transition away from the fossil fuels.





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