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Sustainability investors reconsider bp holdings in wake of


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

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Sustainability investors reconsider bp holdings in wake of

  1. 1. With BP‟s reputation as a leading sustainable company destroyed,investors weigh alternatives of divestment or increased engagement.
  2. 2. -- The implications of thedisastrous oil spill in the Gulf of Mexico are many.As the stock price of BP, the oil and gas companyresponsible for the disaster, plummets—as of thiswriting, it has lost more than a third of its valuesince the explosion that killed 11 workers— and itsvery survival as a company seems threatened, onesuch implication is the materiality of environmental,social, and corporate governance (ESG) issues.On Wednesday, FairPensions, the UK-basedorganization whose mission is to promotesustainability investment in the pensions andinvestment industry, issued a press release whichstated, “The need for responsible ownership hasbeen underlined by the financial crisis and by thelatest in a list of avoidable BP crises.”
  3. 3. However, FairPensions continued, “recognition of thefinancial risks of „extra-financial issues‟ is usually notmatched by practice on the part of pension funds andtheir fund managers.”Safety violations by BP have become almost acommonplace in recent years, even before the Gulfdisaster. In 2005, an explosion at the company‟s TexasCity Refinery in Texas killed 15 workers and injured morethan 170. In 2009, the US Occupational Safety and HealthAdministration (OSHA) imposed a fine of $87.4 million, thelargest ever by the agency, on the company for failing tocorrect safety hazards in Texas City.In 2006, 200,000 gallons of oil spilled at Prudhoe Bay onthe North Slope in Alaska, leading to payment by thecompany of $20 million in fines and restitution.
  4. 4. Yet somehow, despite its record of safety violations, BP wasconsidered a leading sustainable company, at least until theGulf oil spill. In 2008, Fortu ne magazine ranked BP among thetop ten most accountable big companies, citing thecompany‟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 suchincidents from happening again.”Furthermore, until the Gulf disaster, BP was listed on the DowJones Sustainability Indexes (DJSI), which tracks the financialperformance of leading sustainable companies. On May 31,BP was removed from the DJSI. “The extent of the oil-spillcatastrophe in the Gulf of Mexico and its foreseeable long-term effects on the environment and the local population, inaddition to the economic effects and the long-term damageto the reputation of the company,” were cited as reasons.BP remains on the FTSE4Good Index Series, which is notscheduled to reconsider its constituents until September.
  5. 5. asked Cary Krosinsky, the seniorrepresentative for Investor and Corporate Services in NorthAmerica for Trucost, an environmental research organizationthat maintains the world‟s largest database of corporategreenhouse gas (GHG) emissions, about BP‟s seeminglyundeserved reputation as a sustainable company.Krosinsky, who is also co-editor of the book “SustainableInvesting: The Art of Long Term Performance,” and teaches atColumbia and the University of Maryland,, “If you track companies most commonlyheld by socially responsible investment (SRI) funds, BP iscertainly among the most held, and probably the most heldoil and gas company.”Historically an industry sector not held in especially highregard by SRI funds, the trend toward a best-in-classapproach to investment strategy has enabled sustainabilityinvestors to diversify their portfolios by including companiesfrom sectors like oil and gas, when those companiesdistinguish themselves from their peers on ESG issues.
  6. 6. One of the most important methods of determining acompany‟s ESG performance is through an assessment ofits corporate reporting. As Krosinsky said, “BP‟s reportingisn‟t bad. So investors who are pushing integrated reportingwill give them a high score.”In the wake of the Gulf disaster, it is not surprising to learnthat some sustainable funds have divested their holdings inBP. On April 29, nine days after the explosion of the oilrig, Pax World sold its shares of BP stock. Walden AssetManagement sold its stake in BP in February, citing healthand safety concerns.On the other hand, Domini Social Investments has neverheld BP in its portfolios. Adam Kanzer, the ManagingDirector and General Counsel of Domini,, "BP was specifically excluded years backbased on their safety record, and we told them this."“Divesting is a powerful tool, and if you don‟t use it enoughyou don‟t have it in your toolbox,” Krosinsky said.
  7. 7. One sustainability fund that is holding onto its shares in BP fornow is MMA Praxis Mutual Funds. spoke withMark Regier, director of stewardship investing for MMA Praxis,about its relationship with BP.Noting that MMA Praxis funds have included BP as a constituentsince 1999, Regier said, “We have a history of shareholderengagement with BP going back over ten years.” Following theTexas City refinery explosion, Regier said, “What weappreciated at the time was BP‟s philosophy of openness, ofresponsive engagement with shareholders. I think we were ableto highlight for the company some key concerns regardingenvironmental and health and safety issues.”Under former CEO John Browne, BP made considerableinvestments in renewal energy technologies. After TonyHayward took over as CEO in 2007, however, “What we haveseen since is a bit of a shift, back to the basics of oil generationand a lessening of the focus on renewables,” Regier said.“The question is, what was the impact of that shift on thedisaster in the Gulf?” Regier continued.
  8. 8. Noting that there have been “calls in some circles todivest of BP, because of the impacts of the problem,”Regier said, “We think this is a critical time for us to beengaged with the company during this period of crisismanagement. Engaging with companies at times of crisisis a very important role for social investors.”Following the explosion in the Gulf, the investment teamof MMA Praxis met with the senior management of BP foran update on the company‟s efforts, and to expressconcern over the explosion and its aftermath.“What was important in BP‟s response was that time wasmade for senior management to meet with us and tohear their commitment to shareholder engagement andcommunication,” Regier said. “One of the things thatsuffered in the shift after the Texas City disaster and themanagement shakeup was a weakening ofcommunication channels.”
  9. 9. “When you have pressures for increased earnings andreduced costs, poor choices are going to be made,”Regier said. “Do the poor choices that brought us to thisplace have their roots in polices and practices? Ourrecommendation is, what‟s the framework that can beput into place to avoid such disasters in the future?”From Krosinsky‟s perspective, however, “Three strikes andyou‟re out might be a viable approach to companiesthat continue to have major violations. This is the thirdmajor calamity for BP.”“There are major questions about BP from a governancestandpoint,” Krosinsky continued. “For asset owners therehave to be major risk concerns here. The more mindfulthey are of the risks from all aspects of sustainability, thebetter it will be for shareholders.”