BP's chickens are finally coming home to roostJuly 2010
Index expulsions and disinvestments are following hard on the heels of the worst oil spill in US history. EP looks at some consequences in the SRI sector
The expensive and embarrassing fallout for BP from the Gulf of Mexico oil spill is already beginning to have various global ramifications for the beleaguered multinational oil company. But it has also suffered in the world of socially responsible investment, where perhaps the most telling effect so far has been its ignominious expulsion from the much-respected Dow Jones Sustainability indexes (DJSI).
The unprecedented action, in advance of the DJSI's annual review of constituents, has been taken under emergency rules allowing for removal of a business 'following extraordinary events'. Dow Jones said the extent of the catastrophe 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 included in the analysis preceding BP's removal.
Companies are selected annually for the indexes through an assessment by the Geneva-based analyst company Sustainability Asset Management (SAM). Exclusions are most likely in instances of serious fraud, severe human rights abuses, extensive redundancies or workforce conflicts, or 'catastrophic events or accidents' such as the oil spill.
If a critical issue arises, SAM analysts assess the extent of the crisis within the company, geographically, and in terms of media coverage. If the impact of the crisis on the company's reputation and core business is 'far-reaching', covered worldwide in the media, or is an important concern for the business, they examine the quality of a company's crisis management.
They decided BP performed unsatisfactorily on informing the public, acknowledging responsibility, providing relief measures, involving relevant stakeholders and developing solutions.
An internal SAM committee weighed the severity of the crisis in relation to the company's crisis management and then decided on expulsion.
As a result BP may be dropped from funds that use DJSI indexes as a benchmark. Large-scale disinvestments from BP have not yet occurred, but the company's share price has fallen dramatically since the spill. It has also agreed to suspend dividends until the end of this year, and to finance a $20billion (£13.3bn, €16.1bn) clean-up and compensation fund.
BP has also been removed from the Nasdaq Global Sustainability 50 Index as part of its semi-annual review of listed companies, and by the US-based Pax World, a socially responsible mutual fund founded in 1971. Both essentially made their decisions based on safety violations that took place before the Gulf spill, but it served to strengthen their resolve.
The FTSE4Good index says BP will remain listed at least until its regular September review of constituents. But the European corporate responsibility rating agency Vigeo has downgraded BP, and the mainstream Moody's rating agency demoted BP's long-term debt by three notches.
Vigeo said its downgrading reflected 'the serious doubts raised on the sincerity of information released by the company on the level of security of its offshore facilities and the volumes of oil leaked'.
Additionally, it has downgraded its opinion on BP's standards of governance, questioning 'the effectiveness of its audit systems and controls and the monitoring by the board of key environmental and social risks'.
In particular, Vigeo noted BP's lack of progress since two other serious incidents - the Texas City refinery accident in 2005 and the 2006 Prudhoe Bay spill in Alaska.
More unwelcome news has come from a study by the Zurich-based RepRisk consultancy, showing that BP is one of the world's five most reputationally challenged oil companies along with Transocean, ExxonMobil, Shell and Chevron.
Transocean is the owner of the Gulf of Mexico well where the leak occurred but, like other companies connected with the operation, such as Halliburton, has largely escaped public and political hostility.
David Jones, global chief executive of the advertising agency Havas, told the Who Cares Wins conference in London last month that BP has emerged as a classic case of a company talking the talk on sustainability but not walking the walk.
'When you change your logo to a flower, giving the impression you are one of the greenest companies on the planet and then this happens, people will come up and bite you. It's a comeuppance,' he said.
Trucost, the global environmental data provider, suggested the disaster could be a landmark in the battle to make capital markets take companies' environmental impacts seriously.
It commented: 'In the same way that the Enron and Parmalat crises catapulted corporate governance into the mainstream investment agenda, it could be that the BP oil spill is the trigger to change investment behaviour forever.'
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