BP or Not BP?

It is clearly time for me to comment on the BP disaster, one of the worst environmental accidents the world has faced. My personal feelings of supreme dismay and outright nausea aside, these comments are focused on the relationship, past and present, between BP and the sustainable and responsible investment (SRI) community, of which you and I are a part.



Let me start by saying YES – until recently BP was a holding in most of First Affirmative's portfolios. Some of you already know this, and some of you might be shocked, even angry, to discover it now. After all, you've engaged First Affirmative and me to manage a “sustainable” portfolio for you – how is it possible for us to explain holding the stock of a company that has caused one of the world's worst eco-catastrophes?

To address this let me review some of the basic processes that under gird SRI. One of these is the screening of portfolios using social and environmental criteria. Another is shareholder advocacy. SRI screening usually combines the “screening out” or de-emphasis of the securities of companies that are deemed the worst offenders, i.e., that score the lowest when measured against SRI screening criteria, along with the proactive “seeking out” of companies that score the highest. Shareholder advocacy only takes place with the companies that are held in SRI portfolios. Essentially, this is the process of shareholder engagement, dialogue, and negotiation with companies, the aim of which is to effectively influence them to adopt sustainable and socially responsible business practices. Note there is a built-in tension between these strategies – we cannot engage in shareholder advocacy if we do not hold the stock of the target company.

SRI financial advisors and portfolio managers seek to resolve this tension in different ways. Some emphasize SRI screening, and engage in shareholder advocacy only with companies that definitively pass the screens. Some, on the other hand, de-emphasize screening to create more opportunity for shareholder advocacy, often with companies presenting high profile social or environmental concerns (Wal-Mart, Merck, Exxon Mobil, and now BP, for example).

Prior to the Deepwater Horizon disaster, how did BP fit into this scenario? First, BP passed the SRI screening criteria employed by many SRI practitioners. SRI screening is based on exhaustive eco-social research conducted by a number of leading SRI research firms, among them KLD, Innovest, Riskmetrics, and IW Financial. Typically, BP scored well enough to get more than passing grades from most of these firms. For example, IW Financial recently gave BP an overall score of 72 of a possible 100 points (100 being the best possible score – 50 is usually passing – using First Affirmative criteria). Moreover, despite noted weakness in the area of spillage, BP's environmental procedures – policy, management systems, and reporting – were graded “exceptional” (BP also scored highly in upholding human rights globally). BP was listed as part of the Dow Jones Sustainability Index and a number of KLD social indexes. On the strength of these positive ratings, BP was included in many SRI portfolios, including folios and mutual funds used in our own client portfolios. Additionally, SRI shareholders were able, and did, engage in a variety of shareholder advocacy initiatives with BP. In recent years, BP also sent representatives to the annual SRI in the Rockies conference to report on its social and environmental practices and dialogue with SRI professionals.

By now, many of you might be wondering for obvious reasons, “How can this be?” One esponse is to recognize, pragmatically, that the entire world economy runs on energy the vast majority of which, to date, is still derived from oil. To invest at all in the global economy is to invest, unavoidably, in oil. In a sustainable portfolio, of course, we are also investing in and emphasizing cleaner, alternative forms of energy (solar, wind, and geothermal, for example). Yet the large oil companies are still the world business leaders in energy production and supply and to invest in the best of them from an SRI perspective is to participate in influencing those companies to take the lead in moving to more sustainable forms of energy. And, BP has been a world leader in the research and development of cleaner energy sources.

Not BP

It is also important, ho wever, to recognize the very real-world differences between procedures and protocols designed to achieve certain results, and the actual results achieved in the implementation (or lack thereof) of those procedures and protocols. This involves another integral part of the portfolio evaluation of companies – risk assessment. The BP disaster has opened the SRI community's (not to mention the world's) eyes to the tremendous environmental, financial, and business risks inherent in deep-water ocean drilling for oil. Indeed, some have argued (in hindsight, mostly) that BP and other oil companies are speculative investments at best purely from a risk assessment viewpoint.

Let me summarize First Affirmative's and some SRI community responses to the disaster. Prior to the accident, BP was represented in the following First Affirmative folios at Foliofn: Advisor Partners ADR, Boston Common ADR, Miller/Howard Income- Equity, Progressive Asset Management ADR, Legg Mason Growth, Walden Large Cap. As of today, all of these managers (of their own accord or at First Affirmative's insistence) have divested of their BP stock. These moves have been made as the result of the reassessment of the risk factors (financial and social) and actual environmental performance of the company in light of the Deepwater Horizon explosion. If you have an account with us at Foliofn, you should no longer be a shareholder in BP. In the SRI mutual fund arena, most of the funds that held BP have since divested. There are a few notable exceptions. Calvert (in its Large Cap Value Fund only) and MMA Praxis have elected so far not to divest, given their SRI emphasis on and philosophy of shareholder engagement. On the other hand, it can also be noted that Domini and Portfolio 21, based on their particular SRI screening criteria, had elected not to hold BP prior to the accident.

Closer to home, I can report the professional advisors of the First Affirmative Financial Network nationwide have been engaging in thorough and deep discussion of this issue almost continuously since the initial explosion. SRI is not a perfect process and I can tell you we have done much soul-searching and learned a great deal from this ordeal. We are not of one consensus, either. Some of us feel we cannot invest in multi-national oil companies at all and still honestly refer to ourselves as SRI advisors. I do not agree. I believe we should invest now in and toward the type of sustainable economy the world and its people need. I also believe in moral persuasion and influence through engagement, dialogue, and negotiation. We will have little sway over the companies we walk away from and ignore. It is to the voices of their customers and investors that astute companies, financially sound companies, must ultimately listen. Those companies will become more sustainable and responsible only when, and if, we speak – and speak with authority.

Note: Mention of specific securities should not be considered an offer to buy or sell that security. For information on the suitability of any investment for your portfolio please contact your investment adviser.