BP Disaster Vexes Socially Responsible Investors

Investors may be indirectly holding shares of an outfit connected to the worst oil spill in U.S. history even if they purposely chose equity funds that specialize in companies friendly to the environment.

Until May 31, a major holding in the Dow Jones Sustainability Indexes was BP (BP), the owner of the well spewing 12,000 to 19,000 barrels of oil per day into the Gulf of Mexico. BP shares, which have fallen 38 percent since the oil rig exploded on Apr. 20, made up 1.95 percent of the market cap of the DJSI World index until it was removed.

Several mutual funds specializing in socially responsible investing—which almost always includes environmental factors—also owned or continue to hold BP.

According to Bloomberg data as of Mar. 31, two Legg Mason (LM) Social Awareness funds owned a combined 112,412 shares of BP with a total value then of $6.4 million. The company did not respond to a request for comment. Wells Fargo (WFC) declined to discuss 2,449 BP shares held in its Social Sustainability Fund on Mar. 31.

Safety Concerns

Pax World, which calls itself a "sustainable investing" manager, sold 8,000 shares of BP stock on Apr. 29 in response to the spill. However, Pax World President and Chief Executive Officer Joe Keefe says the company had already been reviewing its BP holding after the Occupational Safety & Health Administration in October 2009 issued its largest fine ever, $87.4 million, for safety violations. OSHA's investigation followed an explosion in March 2005 that killed 15 workers at BP's refinery in Texas City, Tex.

"Our analysis was leading us to the conclusion that they had serious safety management problems," Keefe says.

Some other socially and environmentally conscious fund managers sold BP shares months before the disaster. A spokeswoman for Walden Asset Management says it sold its entire position in BP on Feb. 16, "due to concerns about a continuing pattern of health and safety violations."

Some socially responsible investors continue to hold the stock.

Mutual fund manager MMA Praxis is still permitting its portfolio managers to buy BP despite the spill. Like other socially responsible investors, MMA Praxis emphasizes BP's role as a leader in alternative energy and other initiatives.

"Over the years, [BP] committed itself to high standards," says MMA Praxis' Director of Stewardship Investing Mark Regier. For now, he's reserving judgment, while as a shareholder urging BP to respond appropriately to the spill. "We need to let the investigations run their course," he says.

Relative Reputation

The U.S. Justice Dept. said on June 1 it was investigating the causes of the oil spill. BP has argued with other companies over who is to blame for the spill. While BP owns the well, Transocean (RIG) owns the rig and Halliburton (HAL) was a contractor operating the rig.

For environmentalists, BP had a better reputation than many of its large oil and gas peers. Raymond James (RJF) analyst Pavel Molchanov notes that BP devotes about 3 percent of its capital spending to renewable power like wind, solar, and biofuels. ExxonMobil (XOM) spends less than 1 percent.

"No. 1, [BP] understood there are [public relations] benefits for making those investments, and second, they do actually believe they can lead to greater growth and earnings potential in the long run," Molchanov says.

By investing in BP, investment managers were sticking to one approach to socially responsible investing.

By focusing on the "best in class," managers can buy companies in questionable industries as long as they are better than their peers, says Meir Statman, finance professor at Santa Clara University's Leavey School of Business.

"All companies, like all people, have flaws and advantages," Statman says. "In this sense, BP was considered to be one of the relatively good guys."

Without a "best in class" approach, such managers might not be able to buy any oil or gas companies—which could sharply limit how diversified their portfolios are.

"From an investment perspective, [if] you start excluding whole industries and sectors, you're going to be increasing portfolio risk," says Pax World's Keefe.

Investor Commitment

"One interesting question [is] how much people are willing to sacrifice to be socially responsible," says Marcin Kacperczyk, a finance professor at New York University's Stern School of Business. By bailing out of BP for environmental reasons now, some investors may be selling at exactly the wrong time, before the stock has a chance to recover, he notes.

Another open question is how well investors can identify companies likely to adhere to socially responsible investing standards. Kacperczyk warns that ratings of companies on environmental, social, and other factors can be "easy to manipulate."

In 1997, BP was one of the first major energy companies to say it was taking the problem of climate change seriously. Though safety problems have plagued the company more recently and it dropped out of the U.S. Climate Action Partnership in February 2010, the company is still rated highly on some measures of social responsibility and transparency. One research firm, KLDGlobalSocrates, gives the company an AAA grade for "sustainability reporting and engagement."

All that is easy to forget now, however, as oil spreads out across the Gulf of Mexico.

"Against the backdrop of this kind of disaster," says Molchanov, "the fact that BP makes solar panels and owns wind farms is not going to be much help."

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