Environmental problems can result in many investors shunning oil and coal stocks in favor of companies involved with solar energy and biofuels. But those cleaner, promising alternatives can have a dark side.

At a session Monday at the SRI in the Rockies conference in New Orleans, three panelists discussed challenges facing the solar and biofuels industries and what investors should know when choosing companies in which to invest. Financial advisors, investors, fund managers and others from around the world interested in sustainable investing attend the conference, produced by First Affirmative Financial Network.

One panelist, Tom Dieppe, who manages sustainability funds for Henderson Global Investors in the U.K., noted solar-panel manufacturing can pollute the environment if precautions aren't taken. He cited a case that was headlined in The Washington Post involving Suntech, one of the top 10 manufacturers of solar cells in the world. The paper reported in March 2008 that one of Suntech's key Chinese suppliers was discharging silicon tetrachloride--a toxic waste from the production of polysilicon that's used in photovoltaic panels--that was believed to be threatening the health of children who lived in the vicinity. Once the news was out, the price of Suntech shares dropped 12 percent, Dieppe said.

"It's a big reputational risk," Dieppe said. "This is meant to be a clean industry. Actually what was happening was that they were polluting somewhere in the supply chain, and what is the point of having cleaner energy if that's what you're doing? You're not helping the environment at all. If we're going to invest in clean energy, it's really got to be cleaner."

Henderson contacted Suntech and held meetings with them over several months. "We said to them, listen you've got to audit your suppliers, you've got to get them to agree to not breach environmental regulations," Dieppe said. "You've got to check out what they're doing and you've got to stop letting people supply you who pollute the environment in this kind of way."

He added that Suntech told Henderson it was the only investment firm that had engaged with them in such detail, with specific suggestions of what they should do. Suntech did end up stopping the supplier from polluting and did set up systems for other suppliers that included getting them to sign contracts saying they wouldn't dump toxic chemicals, Deippe noted.

After that, Henderson expanded its work and developed a survey for solar-panel manufacturers that evaluates how their activities affect the environment, what chemicals they use and how they treat their workers, among other things. Boston Common Asset Management, Pax World and Walden Asset Management also joined the effort. As a result of that survey, the groups produced a solar scorecard, www.solarscorecard.com, which ranks the top ten photovoltaic panel makers on environmental and social factors.

In 2011, the top three PV panel manufacturers in the ranking were Canadian Solar, First Solar and Hanwa Solar One. Dieppe said that Henderson welcomes other investment or advisory firms to get involved with the survey.

Another panelist, Carl Zichella, director for western transmission for the Natural Resources Defense Council (NRDC), said one of the biggest challenges facing the solar industry is finding locations for large-scale solar projects. Minimizing environmental impacts and finding sites that are large enough can be difficult, but not impossible.

One positive project underway, he said, is the solar installation near Harper Dry Lake in the Mojave Desert in southern California that will generate 160 megawatts of electricity. That's enough juice to provide power for 32,000 homes and use 936,000 mirrors. That project is small compared with what will come in the future. For example, Zichella noted, the Blythe solar project in Riverside County, California, will generate 1,000 megawatts of electricity, or enough power for as many 300,000 homes when it's completed.

"Business as usual isn't an option," Zichella said. "The impacts from carbon dioxide pollution are affecting us in all kinds of ways and there is no perfect solution to this. There is no such thing as an impact-free energy source. However, it's still renewable energy and you're not destroying mountaintops to create it."

He added moving ahead with solar and other renewable energy projects is needed to slow climate change. "You may have noticed just last week a news report by the Rocky Mountain Climate Organization that posited a forecast of warming for Yellowstone National Park of 10 degrees Fahrenheit by the end of the century," Zichella said. "We may have bought a little time on carbon emissions due to the economic downturn, but we are still in a situation where we can't expect that energy growth is going to remain stagnant for an indefinite period time."

Dustin Mulvaney, a postdoctoral researcher in the Department of Environmental Sciences, Policy and Management at the University of California, Berkeley, spoke mainly about biofuels.

He noted a backlash against biofuels started five or six years ago, subsequent to the energy policy act of 2005 that mandated the production of 36 billion gallons of ethanol and policies in Europe that encouraged biodiesel production. "We saw a rapid expansion of land use that was committed to fuel production. We started seeing massive deforestation, particularly in Southeast Asia; we saw images of Orangutan habitat and tiger habitat being destroyed. And then we heard certain accusations against abuses to labor, slave labor even, in the sugarcane industry in Brazil."

People then started questioning the benefits of biofuels, and some controversial studies came out that questioned their energy pay back time, which was relatively low when compared with solar and geothermal, Mulvaney said. "We started seeing so much fossil fuel was being used to grow things like corn that in some cases there was more carbon being emitted than when you burn gasoline," he said.

And that was before land use was taken into account. Clearing land caused increased carbon emissions and in some cases deforestation, he said. Controversial studies showed palm diesel oil was the worst offender, with it taking 423 years to pay back the carbon lost while clearing land in Malaysia and Indonesia.

Others argued that producing biofuels actually cultivates the next biological invaders because the characteristics looked for--high seed production, high density and drought tolerance, for example--are all characteristics of invasive species, Mulvaney said. Still others argued that a lot of innovative biofuel technologies rely on genetic engineering. "Whether or not there's a risk associated with it, there's a perception of risk," he noted.

"Most recently, the controversy around biofuels has been extended to land grabs, particularly in parts of the world where there are food security issues," Mulvaney said.

But one must keep the problems with biofuels in perspective. "To put them in context, the dark side is not nearly as dark as what we see in the fossil fuel industry," Mulvaney said. "Yet that doesn't mean we should be treating these sectors homogeneously even within the sector."

--Dorothy Hinchcliff