Risk Lessons from BP

According to an article in Pensions & Investments, the BP disaster will cause managers and investors to become more aware of how ESG-related risks can be material to a company’s performance, experts say. This will drive managers and investors to pay closer attention to ESG risks and to push for changes in areas such as corporate disclosure that might help investors better understand ESG risks.

At the heart of the problem is that stock analysis never assumes anything will go wrong, said Ran Fuchs, global head of ESG analytics at RiskMetrics Group: “It is something missing from analysis — not just ESG analysis. In the past few years, a lot of bad things have gone wrong, and we still ignore it in our analysis.”

Most of the best-in-class products labeled ESG had BP in the portfolio (before the disaster), yet there seems to have been plenty of warning signals in hindsight. According to ABC News:

  • In 2007, a BP pipeline spilled 200,000 gallons of crude into the Alaskan wilderness and BP got fined $16 million.
  • Then the Justice Department required the company to pay approximately $353 million as part of an agreement to defer prosecution on charges that the company conspired to manipulate the propane gas market.
  • In two separate disasters prior to Deepwater Horizon, 30 BP workers were killed and more than 200 have been seriously injured.
  • According to the Center for Public Integrity, in the last three years, BP refineries in Ohio and Texas have accounted for 97 percent of the “egregious, willful” violations handed out by OSHA.
  • OSHA statistics show BP ran up 760 “egregious, willful” safety violations, while Sunoco and Conoco-Phillips each had eight, Citgo had two and Exxon had one comparable citation. (BP’s Horrible Safety Record: It’s Got 760 OSHA Fines, Exxon Has Just 1, Business Insider, 6/2/10)

The P&I article says we’ve learned four key things from the BP spill:

  • the importance of inherent sector risks;
  • the potential of politics affecting how a company manages a disaster;
  • media response will be much swifter and more international than ever before; and
  • companies must take responsibility for their suppliers and contractors publicly from the start of the disaster. (Managers learn from the BP catastrophe, 6/28/10)(

As early as 1993, ICCR members filed six resolutions to more closely regulate subprime mortgages. (Two Overlooked Lessons From the Financial Crisis, 12/31/10) We need to pay more attention to signals of excessive risk.

Maybe it’s time for index funds to weight stocks based on risk. David R. Koenig, recently launched The Governance Fund, LLC, a private investment management firm that uses a proprietary model of corporate governance based on several data-sets to capitalize on what he terms “the value gap” between well-governed and poorly governed companies. Hopefully, we’ll see more attention to strategies that eventually may reduce overall risks to our environment. Kenneth Rogoff even speculates the BP spill may rekindle interest in a carbon tax? (Can Good Emerge From the BP Oil Spill?, Project Syndicate, 7/2/10)

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