The Gulf of Mexico oil spill is threatening to affect more than just the environment. Investors in BP, including pension funds, have been warned they could suffer in terms of both income and regulation if BP’s share price continues to fall and the dividend payment suspension continues beyond Q3 2010.
The Deepwater Horizon offshore drilling platform caught fire and sank on 20 April 2010, with the loss of 11 lives, yet more than two months later BP is struggling to stop the oil flow. And as of mid-June the clean-up operation had cost $1.6bn (€1.3bn), including compensation claims already paid.
FairPensions, a UK lobbying group, says pension fund members are also affected by the disaster as BP’s share value fell by around £44bn (€53bn) - approximately a third of its value - while the full costs of litigation, fines and environmental clean-up are unknown.
The National Association of Pension Funds (NAPF) points out that UK pension funds have already diversified away from UK equities.
Chief executive Joanne Segars says: “We estimate that UK pension funds’ exposure to BP is about 1.5% of total assets, which are in excess of £800bn. BP’s difficulties should not have an immediate or serious impact on those saving into a pension, or on those who have retired.”
She admitted that the concern for institutional investors is the impact of the oil leak on BP’s longer-term growth and future dividends. “BP’s priority should be to get this crisis under control to protect the long-term strength of the company. Beyond that, shareholders will have many questions that need to be answered.”
Meanwhile, FairPensions is calling for tighter regulation on the environmental, social and governance (ESG) policies of pension funds, as it claimed more could have been done to foresee and prevent the disaster.
Duncan Exley, FairPensions’ director of campaigns, says: “The scrutiny by UK pension funds of companies’ exposure to ESG risk is inadequate. The BP Gulf spill is a stark example, but the problem is much wider.
“The failure of institutional investors to challenge poor corporate governance, short-termism and risky business models in the run-up to the financial crisis is well documented. Then as now, pension fund members paid a heavy price for this neglect.”
BP’s decision not to pay three quarters of dividends represents the first such cut in 18 years. However, Barbara Evans, sustainability research analyst at RCM, suggests that one positive result of the oil spill “must surely be further support for the integration of ESG risks in company analysis and investment decisions”.
Trucost, the global environmental data provider, notes that one investor response could be to exclude companies such as BP from investment portfolios. But as the global economy is highly dependent on earnings from this industry, it instead suggests underweighting companies that have larger environmental impacts than the sector average.
Simon Thomas, chief executive at Trucost, says: “Our data shows BP is 16% more carbon intensive than its FTSE All-Share sector peers and therefore runs more carbon risk per unit of revenue than the average oil and gas company. In other words, Trucost clients that use its data to track the FTSE 350 with reduced carbon risk are significantly less exposed to the recent collapse in BP’s share price.”
Trucost admits that reliable, comparable and consistent ESG data is very hard to find for some companies. “Data on the environmental impacts of companies is precisely what is needed if pension funds are to integrate environmental risk assessment into their investment practices and protect their pension savers,” Thomas added.
Evans of RCM says politicians have a mandate to take action against irresponsible companies: “In 2010 we have seen this with Goldman Sachs, and now with BP in the US. Both have felt the impact in a plummeting share price. Other companies with a prominent place in the public eye need to take note.”