With BP‟s reputation as a leading sustainable company destroyed,

investors weigh alternatives of divestment or increased engagement.

SocialFunds.com -- The implications of thedisastrous oil spill in the Gulf of Mexico are many.As the stock price of BP, the oil and gas companyresponsible for the disaster, plummets—as of thiswriting, it has lost more than a third of its valuesince the explosion that killed 11 workers— and itsvery survival as a company seems threatened, onesuch implication is the materiality of environmental,social, and corporate governance (ESG) issues.

On Wednesday, FairPensions, the UK-basedorganization whose mission is to promotesustainability investment in the pensions andinvestment industry, issued a press release whichstated, “The need for responsible ownership hasbeen underlined by the financial crisis and by thelatest in a list of avoidable BP crises.”

However, FairPensions continued, “recognition of thefinancial risks of „extra-financial issues‟ is usually notmatched by practice on the part of pension funds andtheir fund managers.”

Safety violations by BP have become almost acommonplace in recent years, even before the Gulfdisaster. In 2005, an explosion at the company‟s TexasCity Refinery in Texas killed 15 workers and injured morethan 170. In 2009, the US Occupational Safety and HealthAdministration (OSHA) imposed a fine of $87.4 million, thelargest ever by the agency, on the company for failing tocorrect safety hazards in Texas City.

In 2006, 200,000 gallons of oil spilled at Prudhoe Bay onthe North Slope in Alaska, leading to payment by thecompany of $20 million in fines and restitution.

Yet somehow, despite its record of safety violations, BP was

considered a leading sustainable company, at least until the

Gulf oil spill. In 2008, Fortu ne magazine ranked BP among the

top ten most accountable big companies, citing the

company‟s investments in renewable energy and its creation,

in the aftermath of the Texas City explosion, of a safety, ethics,

and environmental assurance committee, “to prevent such

incidents from happening again.”

Furthermore, until the Gulf disaster, BP was listed on the Dow

Jones Sustainability Indexes (DJSI), which tracks the financial

performance of leading sustainable companies. On May 31,

BP was removed from the DJSI. “The extent of the oil-spill

catastrophe in the Gulf of Mexico 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 cited as reasons.

BP remains on the FTSE4Good Index Series, which is not

scheduled to reconsider its constituents until September.

SocialFunds.com asked Cary Krosinsky, the senior

representative for Investor and Corporate Services in North

America for Trucost, an environmental research organization

that maintains the world‟s largest database of corporate

greenhouse gas (GHG) emissions, about BP‟s seemingly

undeserved reputation as a sustainable company.

Krosinsky, who is also co-editor of the book “Sustainable

Investing: The Art of Long Term Performance,” and teaches at

Columbia and the University of Maryland, told

SocialFunds.com, “If you track companies most commonly

held by socially responsible investment (SRI) funds, BP is

certainly among the most held, and probably the most held

oil and gas company.”

Historically an industry sector not held in especially high

regard by SRI funds, the trend toward a best-in-class

approach to investment strategy has enabled sustainability

investors to diversify their portfolios by including companies

from sectors like oil and gas, when those companies

distinguish themselves from their peers on ESG issues.

One of the most important methods of determining a

company‟s ESG performance is through an assessment of

its corporate reporting. As Krosinsky said, “BP‟s reporting

isn‟t bad. So investors who are pushing integrated reporting

will give them a high score.”

In the wake of the Gulf disaster, it is not surprising to learn

that some sustainable funds have divested their holdings in

BP. On April 29, nine days after the explosion of the oil

rig, Pax World sold its shares of BP stock. Walden Asset

Management sold its stake in BP in February, citing health

and safety concerns.

On the other hand, Domini Social Investments has never

held BP in its portfolios. Adam Kanzer, the Managing

Director and General Counsel of Domini, told

SocialFunds.com, "BP was specifically excluded years back

based on their safety record, and we told them this."

“Divesting is a powerful tool, and if you don‟t use it enough

you don‟t have it in your toolbox,” Krosinsky said.

One sustainability fund that is holding onto its shares in BP fornow is MMA Praxis Mutual Funds. SocialFunds.com spoke withMark Regier, director of stewardship investing for MMA Praxis,about its relationship with BP.

Noting that MMA Praxis funds have included BP as a constituentsince 1999, Regier said, “We have a history of shareholderengagement with BP going back over ten years.” Following theTexas City refinery explosion, Regier said, “What weappreciated at the time was BP‟s philosophy of openness, ofresponsive engagement with shareholders. I think we were ableto highlight for the company some key concerns regardingenvironmental and health and safety issues.”

Under former CEO John Browne, BP made considerableinvestments in renewal energy technologies. After TonyHayward took over as CEO in 2007, however, “What we haveseen since is a bit of a shift, back to the basics of oil generationand a lessening of the focus on renewables,” Regier said.

“The question is, what was the impact of that shift on thedisaster in the Gulf?” Regier continued.

Noting that there have been “calls in some circles todivest of BP, because of the impacts of the problem,”Regier said, “We think this is a critical time for us to beengaged with the company during this period of crisismanagement. Engaging with companies at times of crisisis a very important role for social investors.”

Following the explosion in the Gulf, the investment teamof MMA Praxis met with the senior management of BP foran update on the company‟s efforts, and to expressconcern over the explosion and its aftermath.

“What was important in BP‟s response was that time wasmade for senior management to meet with us and tohear their commitment to shareholder engagement andcommunication,” Regier said. “One of the things thatsuffered in the shift after the Texas City disaster and themanagement shakeup was a weakening ofcommunication channels.”

“When you have pressures for increased earnings andreduced costs, poor choices are going to be made,”Regier said. “Do the poor choices that brought us to thisplace have their roots in polices and practices? Ourrecommendation is, what‟s the framework that can beput into place to avoid such disasters in the future?”

From Krosinsky‟s perspective, however, “Three strikes andyou‟re out might be a viable approach to companiesthat continue to have major violations. This is the thirdmajor calamity for BP.”

“There are major questions about BP from a governancestandpoint,” Krosinsky continued. “For asset owners therehave to be major risk concerns here. The more mindfulthey are of the risks from all aspects of sustainability, thebetter it will be for shareholders.”