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

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

2. SocialFunds.com -- 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.”

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.”

9. “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.”