British pension funds are learning some important lessons from the Deepwater Horizon disaster. Until this crisis, pension funds regarded London-based oil giant BP as a “safe” bet for the long term. After all the oil company’s shares have tended to rise in value year-on-year, as well as providing a regular and robust dividend stream. They have formed a major component of most UK pension fund’s portfolios.
But the Gulf of Mexico environmental disaster, sparked by an explosion aboard the Transocean Deepwater Horizon drilling rig that killed 11 men on April 20, is threatening BP’s very future—and has taught pension fund trustees some harsh lessons.
Given the 34% slide in BP’s share price in the month or so since the disaster struck, British funds are already nursing massive losses. BP’s shares have plunged from 651p on April 18 to less than £4 today as attempt after attempt to stem the flow of oil from the damaged well have failed.
And it looks like things are going to get worse. BP shares plunged further on June 2, after US attorney-general Eric Holder said a criminal and civil investigation into the accident would be conducted by the FBI and federal agencies.
BP, whose reputation has taken a battering because of the crisis, may have to pay fines of up to $60bn as well as damages claims. This together with uncertainty over the cost of the BP clean up is expected to hang heavy over its share price for the foreseeable future. Worst of all for British pension funds is that BP may struggle to sustain its traditionally generous dividend yield (currently 7.5%).
Ultimately, pension funds may come to regret their unquestioning faith in the former British Petroleum. Fair Pensions, a UK-based charity campaigning for responsible investment, believes that pension funds have only themselves to blame.
It accuses pension investors of being blind to non-financial indicators, and therefore oblivious to the true risks associated with investing in an oil giant like BP. Fair Pensions has been highlighting the weaknesses of BP’s risk management, its penchant for low-cost solutions, and investors' negligence of non-financial risks for some years.
Most of the earlier crises at BP have stemmed from its obsession with driving down costs. These have included the explosion at the Texas City oil refinery in March 2005, in which 15 workers lost their lives, and the Prudhoe Bay oil leak in Alaska in 2006. The latter sparked a class action against the company, brought by Lothian Pension Fund and others, accusing BP of "recklessly failing" to maintain oil pipes.
Fair Pensions hopes the BP disaster will finally open investors' eyes to the merits of responsible ownership. In future, it believes institutional investors will be more inclined to properly monitor and manage environmental, social and corporate governance (ESG) factors before they blow up in their faces.
Writing on blogging site Comment is Free, Fair Pensions chief executive Catherine Howarth said:
"The Deepwater Horizon disaster is showing us that environmental and social risks are also financial risks ... We must hope that, in light of the disaster, investors will send a strong signal that greater transparency is required to reassure shareholders that everything possible is being done to identify and address the risks arising from unconventional oil extraction."
Duncan Exley, Fair Pensions’ director of campaigns, said: “From oil leaks to irresponsible lending, ESG issues have a history of precipitating crises which damage our economy and our investments. We urge investors – or the government if necessary - to put in place measures to ensure that these issues are monitored and managed so that the next crisis is less likely to affect us all.”
So, there's a chance that something positive will come out of the BP disaster.
Further reading on CSR and British pension funds
- How to boost investment returns: Invest responsibly, by Ian Fraser [blog post]
- Viewpoint: Ernst Ligteringen, No More Room for Business as Usual
- Best Practice in Investment Governance for Pension Funds, by Roger Urwin
- CSR: More than PR, Pursuing Competitive Advantage in the Long Run, by John Surdyk
- Oil and Gas [sector profile]
Tags: corporate social responsibility , environmental and social governance , fund management , losses , oil and gas , pension funds , risk , stocks and shares