Ethanol is in the news again lately with an accidental discovery about the potential ease of converting excess CO2 to fuel. The process certainly won’t just hand us free energy (first law of thermodynamics, anyone?), but future studies may focus on ways to reduce byproduct CO2. Meanwhile, the story reminded us of corn ethanol’s history, a dramatic backdrop for understanding the materiality of ESG.

Corn: table or tank?

Once seen as a beacon of hope for renewable energy’s advance in replacing fossil fuels, corn Ears of corn - photoethanol has more recently come under fire for inflating food prices, causing a higher rate of rainforest destruction, and diverting subsidies to a program that, according to some, ultimately accomplished little. Well, little other than enriching some Iowans and generating a stack of case studies in how far distortions can ripple outward due to artificial market pressures.

Biofuel production is a great exercise in the consideration of opportunity costs. This is reflected in SASB’s Biofuels industry standards, whose Materials Sourcing category yields the key issue Sourcing & environmental impacts of feedstock production.

Weighing the risks

The SASB brief suggests that biofuel producers should disclose the top five feedstocks (the raw material which will be converted to fuel), what percent of that weight is derived from food crops, and what percent is grown in food-insecure countries (those ranked poorly on the Global Hunger Index) , among other things. These represent supply risks, particularly due to the chance of international state pressure to shift to sources that don’t inflate food prices and involve repurposing of land producing other food crops.

For instance, the brief says:

If U.S. policymakers made a change similar to the one implemented by the E.U., it could significantly alter the country’s biofuel landscape. Companies that are dependent on corn kernel or soy feedstocks could find themselves with few available alternatives. Green Plains Renewable Energy stated in its FY 2013 Form 10-K, “At present, there is limited supply of alternative feedstocks near our facilities. As a result, the adoption of cellulosic ethanol and its use as the preferred form of ethanol would have a significant adverse impact on our business.”

Producers are prompted to describe their market risks, regulatory risks, and reputational risks, and to discuss their strategies to manage those risks, including R&D and more. In fact, read correctly the guidelines aren’t just about how to make disclosures, but for a savvy company could provide a roadmap for internal risk assessment and management.

Knowing is half the battle

This reinforces a point we like to make when discussing the value of ESG metrics with those new to the concept (and one we’ll probably elaborate on soon in another post): Any company that chooses to disclose its ESG metrics is already ahead of those that do not.

The very fact that they’re pausing to shine a bright light on their operations, viewing themselves through the lens of these standards, suggests they’re also more likely to see the tools to improve those operations.

Food vs Fuel is part of our series, ESG Key Issue of the Week. Tune in weekly for new installments.

You’ve heard a lot of buzz about how ESG can help make good investments, but many investors still misunderstand the how and the why.

Environmental, social, and governance data has material value. Simply put, ESG helps reveal how well a particular company is run, how it relates to its stakeholder base, how it manages its risks for the long term, and so on.

The key issues, as outlined by the standards boards, include some obvious ones — for instance, energy management clearly tracks quantifiable costs — and some that at first glance may not seem to promise immediate benefit to the company’s bottom line.

Find out why each of those ESG issues has been recommended for a particular industry based on materiality. Every week we’ll translate another one into plain language. Stay tuned!

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