October 13, 2004
Shell and BP Top Innovest CSR Ratings of Integrated Oil and Gas Companies
by William Baue
Marathon and several companies operating in emerging markets sink to the bottom of the rankings of
corporate social responsibility performers.
How has the January 2004 restatement by Shell (ticker: RD) reducing its proven oil
reserves by 20 percent affected its standing as a corporate social responsibility (CSR) leader?
The scandal, which involved executive foreknowledge of the mistaken statements, resulted in a
significant downgrading of Shell to a three on a scale of ten on the "Traditional Governance Score"
assigned by Innovest Strategic Value
Advisors in its recent Integrated Oil and Gas Industry Report. Similarly, BP (BP) is the target
of widespread stakeholder opposition to its lead role in the Baku-Tblisi-Ceyhan (BTC) pipeline.
The pipeline could adversely affect Kurds according to human rights activists, and sturgeon stocks
in the Caspian according to environmentalists.
However, Shell and BP remain two of
the top overall CSR performers in Innovest's recent integrated oil and gas industry report, along
with Suncor (SU), illustrating how strong CSR
performance encompasses a broad range of activities. CSR laggards identified by the report include
and several companies operating in emerging markets, such as PetroChina, Yukos, and Surgutneftegas.
And, as is the case in the almost every other sector examined by Innovest, the CSR leaders
financially outperformed the CSR laggards, supporting a business case for addressing social and
"The report clearly shows that over the longer term oil and gas
companies with above average ratings outperform those with below average ratings," said Hewson
Baltzell, president of Innovest. "Between 1996 and 2004, the higher-rated companies outperformed
lower-rated companies by 38.6 percentage points (3860 basis points)."
Shell earned a AAA
EcoValue21 rating, which assesses 60 environmental aspects, and a AA Intangible Value Assessment
(IVA) rating, which assesses 80 social aspects (both ratings mimic bond ratings, ranging from AAA
to CCC). BP and Suncor both earned AA EV21 and AAA IVA ratings. Marathon earned a B on the EV21
rating and a BB on the IVA rating, while Surgutneftegas received a CCC on the EV21 rating and a B
on the IVA rating; Yukos earned a CCC on both ratings.
Innovest groups companies earning
BBB and above into a leaders portfolio and compares that portfolio’s financial performance on a
monthly basis to a laggards portfolio filled with companies earning below BBB. While the leaders
portfolio outperformed the laggards portfolio throughout the study period, the financial
performance differential between the two portfolios varies over time. For example, the CSR
laggards portfolio caught up to within 1.6 percentage points in August 2003.
month, we had added coverage of a number of emerging markets companies, notably Surgutneftegas and
Yukos, each of which we give below BBB ratings and each of which performed very well that month
(especially Yukos, with a 26.6 percent total return)," the report notes.
By the same
token, Shell financially underperformed the integrated oil and gas sector from January 2001 through
November 2003, according to a chart in its EV21 rating. In other words, Innovest is not positing a
one-to-one correspondence between CSR performance and short-term financial performance at
individual companies. Rather, it is tracking long-term correlations between the CSR performance
and financial performance across industry sectors.
The report highlights the major
challenges confronting the industry, which include escalating climate change risk, corporate
governance scandals, and the shift towards new, lower impact products.
are taking proactive measures to address these issues," said Juan Silva, Innovest’s oil and gas
senior analyst. "For example, some are reducing their exposure to climate change risk by investing
in renewable energy projects and by developing natural gas and cogeneration."
also recognizing carbon costs in their business strategies and new project development," he
CSR leaders such as Shell, BP, and Suncor are all addressing climate change in
significant ways. However, laggards such as Marathon and Lukoil are not.
and Lukoil have neither reported their position on climate change nor their corporate strategy to
minimize exposure to related regulations," the report states.
Marathon and Lukoil both
earn zeros on Innovest's "Climate Change Risk Abatement Strategies Score," a subcategory similar to
the "Traditional Governance Score."