Biofuel production has a substantial environmental impact that will limit growth in the sector, according to a recent bank report.

The current methods of producing bioethanol and biodiesel are not as environmentally friendly and socially compatible as their "bio" label suggests, says the report* from Basel-based Bank Sarasin.

"The sharp rises in the share price of companies in the biofuels business clearly reflect investors' high expectations. We are less excited about the future of this industry, because its expansion will quickly come up against certain natural constraints," says Matthias Fawer-Wasser, the bank's sustainability analyst.

Large-scale biofuel production could require vast tracts of monoculture plantations that reduce biodiversity and take up agricultural land that could be used for food or animal feed crops, the bank argues. There are also negative implications for agricultural workers in terms of exposure to agrochemicals.

The bank gives bioethanol a better sustainability rating than biodiesel, as there are more raw materials to source it from, a higher yield per hectare and superior performance in terms of reducing carbon dioxide emissions.

But unless there are technological advances in turning plant material into transport fuel – so that not just the edible parts of plants are used – Fawer-Wasser estimates the limit for socially-responsible use of biofuels at 5% of current petrol and diesel consumption in the EU and US. This is less than the EU's target of 5.75% by 2010.

However, of the 16 companies analysed in the report, 10 qualify for inclusion in Sarasin's sustainable investment universe, although for some of them biofuels are a small part of their business.

The 10 qualifying companies are: Abengoa, Biofuels Corp, D1 Oils, EOP Biodiesel, Pacific Ethanol, Renova Energy, Xethanol, Neste Oil, Novozymes, and Sunopta. The six rated as ineligible for inclusion are: Biopetrol Industries, Cosan, Archer Daniels Midland, Agrana, Bunge, and Südzucker.

* Biofuels – transporting us to a fossil-free future? Bank Sarasin, July 2006.