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LESSONS LEARNT FROM BP'S GULF OF MEXICO OIL SPILL

By RL Expert Robert Klijn

Interview with Robert Klijn, RL EXPERT Research and Sustainable Finance and Managing Director of Fair Impact, Netherlands. 
In your everyday business you work with a number of money managers who invest
in the Oil and Gas industry. What were their initial reactions to the BP oil spill?
Robert Klijn: Most mainstream portfolio managers had no idea that BP had been cutting
corners on safety procedures to such an extent and were surprised about the incident.
Most ESG specialists already knew about the underinvestment in safety. However, especially
in the UK, their portfolio management colleagues still invested in BP because of the high dividend payments. ESG specialist Nick Robins was the first to tell me about the poor safety records at BP, well ahead of the explosion at BP’s Texas City refinery in 2005 and the series of incidents that happened thereafter. At that time he was Head of Socially Responsible Investments (SRI) funds at Henderson Global Investors.

Henderson’s retail SRI funds had sold out of BP shares in 2003 on the basis of their views
about the company’s ability to deliver strong environmental, health and safety performance
across the business. (Today he leads the Climate Change Centre of Excellence at HSBC.)
At the time Henderson was concerned about the performance in some of the company’s
businesses – for example in January 2002, the company was fined GBP 1 million following
a prosecution by the Health and Safety Executive at its Grangemouth refinery in the UK. In Alaska too, a 2001 review found a serious backlog of safety-critical maintenance, followed by an outbreak of ‘whistle-blowing’ by concerned employees, including testimony to Congress in March 2002. 
Has the BP spill changed the way investors view environmental risk management?

High-tech production of oil in deepwater and environmental risk management has been highlighted by the spill, especially because it was so close to the US and therefore triggered a lot of media attention. As a result of this issue and many other disasters gaining prominence, investors have spent more money on screening for, and compliance with, ESG issues. Investors like APG are eager to be informed about potential controversial issues at an early stage. Some SRI investors, which had considered BP to be ‘best in class’ in the oil and gas sector, sold out of the company as soon as they heard of the spill.
Considering the accusations leveled at BP about its commitment to safety processes, do you think the BP oil spill has made investors take a more active role in holding corporations accountable for health and safety checks?
The BP spill has indeed made investors more active. Not only with regard to the health and safety checks that relate to their own workers, but also in relation to contractors, like oil services companies Halliburton and Transocean. As many as 52 companies (according to the RepRisk database) have been linked to the BP disaster. In a presentation for SRI investors last October, BP acknowledged that the injury rate of BP’s contractors is 60 percent higher than for
employees – leading to recommendations for “fewer, deeper, and longer” relationships
with contractors.
Have the social, environmental and financial consequences of the BP spill had a positive effect on investments in sustainable energy?
It has stimulated investors in non-sustainable energy to explore sustainable alternatives, 
however in the long-term, a high oil price is still the most important factor for determining the level of investment in sustainable energy. Societal pressure and a change in subsidies from conventional to alternative energy will fuel investment in sustainable energy as well.
What would be your risk management advice for investors who finance energy projects in the Oil and Gas Industries?

Technological improvements will give access to more fossil energy sources, but it will also accelerate the challenge of risk management. The industry should accept that not all innovations are possible without proper consideration of the risks associated with them. To mitigate the risks, investors should diversify their holdings both in terms of sector and geography.
This article was published in the March 2012 issue of RepRisk Insight, an ESG Risk publication co-founded by RL Expert and its partner RepRisk AG for the financial markets and their investee multinational corporations.
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