BP: the landmine ESG investors avoided

With the new oil spill cap put in place over the weekend seeming to last long enough for permanent fixes to come on line, the BP oil spill crisis is likely to shift out of disaster response mode and accountants will ramp up the tallying of costs.  However, one group of investors that managed to shuck their exposure early on, often before the crisis even hit, will be counting profits instead, gains secured by following the emerging use of ESG investment screens, analysis that considers environmental, social and governance factors.

Emergency management and employee safety systems, management oversight and responsibility, regulatory fortitude and independence, are all well lit issues now that the worst-case scenario has happened. But some people got it even before a preventable explosion turned into the largest environmental disaster in U.S. history. A handful of top investment managers, experts in integrating environmental, social and governance analysis with traditional financial analysis, saw the holes in BP’s reputation and dumped the stock early on, saving their investors millions in avoided losses.

Generation Investment Management <http://www.generationim.com/> , co-founded by David Blood and Al Gore, has an investment approach that is based 100% on integrating ESG and traditional analysis. When Lord Browne stepped down as BP’s chief in 2007, Generation interviewed then-new CEO Tony Hayward to assess if BP would continue its transition from a petroleum company to an energy company. BP’s embrace of renewable and alternative energies under Lord Browne is why BP had been favored by so many SRI investors in the first place. What Generation found however was that Mr. Hayward did not share Lord Browne’s vision for a cleaner energy future. BP has since scaled back its renewables investments, and returned its focus to fossil fuels. Generation decided that, under this kind of leadership, BP would no longer be a suitable investment for those looking to only invest in the most forward-thinking management teams, and BP was sold from Generation’s portfolio.

Walden Asset Management <http://www.waldenassetmgmt.com/>  is another top manager that integrates ESG factors and also made the call on BP’s risky behavior early on. BP already had a number of accidents on its record that called the company’s risk management into question. A 2005 explosion at a Texas City refinery killed 15 employees and injured 170 more, and an investigation into a leak in its pipeline in Prudhoe Bay Alaska revealed that BP had neglected the pipeline for years. So, when Occupational Safety and Health Administration (OSHA) data revealed early in the year that BP has a “serious, systemic safety problem in their company <http://www.publicintegrity.org/articles/entry/2085/> ,” Walden also made the assessment that BP’s management was insufficiently addressing key ESG risks. They liquidated the position in February, again saving their investors considerable losses.

Other ESG investors such as Trillium Asset Management and the team I work with at RBC also made the call on BP well before traditional money managers, some of whom are still holding on for dear life. The BP oil spill disaster was a landmine that smart investors managed to avoid by adding ESG analysis to their practice. The point here is that ESG analysis is not an alternative to traditional financial analysis – it’s an augmentation, an extra lens through which to assess how well company leadership is managing risks and capitalizing on opportunities. It makes sense that companies with top management teams are likely to outperform their less sophisticated peers, and ESG investors have demonstrated a competitive advantage in determining who the real leaders are.

1 Comment for this entry

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  Mike Mullins

  September 7th, 2010 on 3:29 pm

  Tom, we are seeing the effects of public awareness in the case of the Target Corp. political contribution, testing the recent US Supreme Court ruling. In this case, the reputational harm to Target won’t show up in its stock price right away, but rather in a slower growth in per-square-foot sales than they might have had, had they not pushed the envelope so aggressively. I hope we will see boards of directors taking a more direct interest in reviewing contributions that could lead to reputational harm. This is what forward-looking and thinking companies must do to protect shareholders and stakeholders from this kind of calculated risk-taking.