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June 04, 2010
Sustainability Investors Reconsider BP Holdings in Wake of Gulf Disaster
    by Robert Kropp

With BP’s reputation as a leading sustainable company destroyed, investors weigh alternatives of divestment or increased engagement.


The implications of the disastrous oil spill in the Gulf of Mexico are many. As the stock price of BP, the oil and gas company responsible for the disaster, plummets—as of this writing, it has lost more than a third of its value since the explosion that killed 11 workers— and its very survival as a company seems threatened, one such implication is the materiality of environmental, social, and corporate governance (ESG) issues.

On Wednesday, FairPensions, the UK-based organization whose mission is to promote sustainability investment in the pensions and investment industry, issued a press release which stated, “The need for responsible ownership has been underlined by the financial crisis and by the latest in a list of avoidable BP crises.”

However, FairPensions continued, “recognition of the financial risks of ‘extra-financial issues’ is usually not matched by practice on the part of pension funds and their fund managers.”

Safety violations by BP have become almost a commonplace in recent years, even before the Gulf disaster. In 2005, an explosion at the company’s Texas City Refinery in Texas killed 15 workers and injured more than 170. In 2009, the US Occupational Safety and Health Administration (OSHA) imposed a fine of $87.4 million, the largest ever by the agency, on the company for failing to correct safety hazards in Texas City.

In 2006, 200,000 gallons of oil spilled at Prudhoe Bay on the North Slope in Alaska, leading to payment by the company of $20 million in fines and restitution.

Yet somehow, despite its record of safety violations, BP was considered a leading sustainable company, at least until the Gulf oil spill. In 2008,
Fortu ne magazine ranked BP among the top ten most accountable big companies, citing the company’s investments in renewable energy and its creation, in the aftermath of the Texas City explosion, of a safety, ethics, and environmental assurance committee, “to prevent such incidents from happening again.”

Furthermore, until the Gulf disaster, BP was listed on the
Dow Jones Sustainability Indexes (DJSI), which tracks the financial performance of leading sustainable companies. On May 31, BP was removed from the DJSI. “The extent of the oil-spill catastrophe in the Gulf of Mexico and its foreseeable long-term effects on the environment and the local population, in addition to the economic effects and the long-term damage to the reputation of the company,” were cited as reasons.

BP remains on the
FTSE4Good Index Series, which is not scheduled to reconsider its constituents until September.

SocialFunds.com asked Cary Krosinsky, the senior representative for Investor and Corporate Services in North America for
Trucost, an environmental research organization that maintains the world’s largest database of corporate greenhouse gas (GHG) emissions, about BP’s seemingly undeserved reputation as a sustainable company.

Krosinsky, who is also co-editor of the book “Sustainable Investing: The Art of Long Term Performance,” and teaches at Columbia and the University of Maryland, told SocialFunds.com, “If you track companies most commonly held by socially responsible investment (SRI) funds, BP is certainly among the most held, and probably the most held oil and gas company.”

Historically an industry sector not held in especially high regard by SRI funds, the trend toward a best-in-class approach to investment strategy has enabled sustainability investors to diversify their portfolios by including companies from sectors like oil and gas, when those companies distinguish themselves from their peers on ESG issues.

One of the most important methods of determining a company’s ESG performance is through an assessment of its corporate reporting. As Krosinsky said, “BP’s reporting isn’t bad. So investors who are pushing integrated reporting will give them a high score.”

In the wake of the Gulf disaster, it is not surprising to learn that some sustainable funds have divested their holdings in BP. On April 29, nine days after the explosion of the oil rig,
Pax World sold its shares of BP stock. Walden Asset Management sold its stake in BP in February, citing health and safety concerns.

On the other hand,
Domini Social Investments has never held BP in its portfolios. Adam Kanzer, the Managing Director and General Counsel of Domini, told SocialFunds.com, "BP was specifically excluded years back based on their safety record, and we told them this."

“Divesting is a powerful tool, and if you don’t use it enough you don’t have it in your toolbox,” Krosinsky said.

One sustainability fund that is holding onto its shares in BP for now is
MMA Praxis Mutual Funds. SocialFunds.com spoke with Mark Regier, director of stewardship investing for MMA Praxis, about its relationship with BP.

Noting that MMA Praxis funds have included BP as a constituent since 1999, Regier said, “We have a history of shareholder engagement with BP going back over ten years.” Following the Texas City refinery explosion, Regier said, “What we appreciated at the time was BP’s philosophy of openness, of responsive engagement with shareholders. I think we were able to highlight for the company some key concerns regarding environmental and health and safety issues.”

Under former CEO John Browne, BP made considerable investments in renewal energy technologies. After Tony Hayward took over as CEO in 2007, however, “What we have seen since is a bit of a shift, back to the basics of oil generation and a lessening of the focus on renewables,” Regier said.

“The question is, what was the impact of that shift on the disaster in the Gulf?” Regier continued.

Noting that there have been “calls in some circles to divest of BP, because of the impacts of the problem,” Regier said, “We think this is a critical time for us to be engaged with the company during this period of crisis management. Engaging with companies at times of crisis is a very important role for social investors.”

Following the explosion in the Gulf, the investment team of MMA Praxis met with the senior management of BP for an update on the company’s efforts, and to express concern over the explosion and its aftermath.

“What was important in BP’s response was that time was made for senior management to meet with us and to hear their commitment to shareholder engagement and communication,” Regier said. “One of the things that suffered in the shift after the Texas City disaster and the management shakeup was a weakening of communication channels.”

“When you have pressures for increased earnings and reduced costs, poor choices are going to be made,” Regier said. “Do the poor choices that brought us to this place have their roots in polices and practices? Our recommendation is, what’s the framework that can be put into place to avoid such disasters in the future?”

From Krosinsky’s perspective, however, “Three strikes and you’re out might be a viable approach to companies that continue to have major violations. This is the third major calamity for BP.”

“There are major questions about BP from a governance standpoint,” Krosinsky continued. “For asset owners there have to be major risk concerns here. The more mindful they are of the risks from all aspects of sustainability, the better it will be for shareholders.”


 

 
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