Biofuels are renewable energy sources that derive from plants, algae, or animal waste. The most popular types of biofuels today are biodiesel and bioethanol, and both play a key role in the transportation sector.

Although there has been a push towards electrifying transport to meet global decarbonisation goals, some modes of transport (marine, aircraft, or heavy-duty) will likely still need liquid fuels. This is where biofuels come into the picture.

Putting to one side the associated emission from refining or distribution, biofuels can be considered a carbon-neutral fuel, producing no net greenhouse gas emissions. This is because the biofuel feedstocks would have absorbed carbon dioxide from the atmosphere during their plant growth, which is simply returned when it is eventually burned. Fossil-based fuels instead add additional carbon to the atmosphere when burned.

However, there have been concerns about the role that biofuels play today. Although bringing about greater energy security and lower emissions than fossil fuels, biofuels are typically created using corn, wheat, or sugar cane. These ‘first-generation’ biofuels are in direct competition with the food supply.

There are also concerns about the large amount of arable land that is required to produce the bio-crops at the scale we need to meet our net-zero goals, which can be linked to deforestation and harm to biodiversity.

‘Second-generation’ biofuels have been developed to deal with concerns surrounding food security instead of using non-food parts of crops that are leftover, or non-food related crops. Novozymes, a company EQ’s portfolios invest in, has made successful innovations in converting the waste part of food crops (i.e., straw) and municipal waste into bioethanol, using enzymes.

Recently, there has been an emergence of ‘third- and fourth- generation’ biofuels, which look to take advantage of aquatic plants, particularly algae and genetically engineered microalgae. Algae can be cultivated on land and water unsuitable for other purposes and have the potential to yield greater volumes of biofuels per acre than first- or second-generation sources.

EQ’s sustainable portfolios exclude conventional fuel producers and want to support innovations that move us away from a reliance on oil, gas, and coal derivatives. While we are weary of the land- and biodiversity impacts of ‘first-generation’ biofuels, our climate solution investment themes are set to capture the next generation as they become more investable.