Trucost Blog / 11 Jun 2010

Trucost clients underweight BP in the Oil & Gas sector

Trucost advises investors to relatively underweight companies which have larger environmental impacts per unit of output than the average for their sector.

Since Simon Thomas founded Trucost over a decade ago he often feared that it would take an environmental disaster for capital markets and society in general to start taking the environmental impacts of companies seriously.

In the same way that the Enron and Parmalat crises catapulted corporate governance into the mainstream investment agenda, so the BP oil spill is likely to change investment behaviour forever.

The Deepwater Horizon crisis is of course the result of a terrible accident and terrible accidents are impossible to predict reliably.  Research providers struggle as much as anyone else in predicting such events; they are not clairvoyants.

Clearly the extent of the environmental impacts that are associated with the oil industry are well known, despite the concerted attempts of oil company public relations executives to paint an entirely more benign picture.

A rational investor response to risks of this magnitude would be to exclude companies such as BP from their investment portfolios, yet as UK pension holders are now discovering, the global economy is highly dependent on the earnings that derive from this industry.  Like it or not, it is simply not economically realistic to dramatically underweight this sector in investment portfolios.  Investors can, however, relatively underweight companies within the oil and gas sector which have larger environmental impacts per unit of output than the average for their sector.

For many years now Trucost has been advising investors to do just this by providing comparable quantified data on the relative environmental impacts of companies. BP is underweighted in these strategies, not because it’s a large Oil & Gas company, but because it is an environmentally inefficient Oil & Gas company relative to its sector peers. Our data shows that 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 & 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 44% collapse in BP’s share price.

I emphasise the word data quite deliberately.  There is a paucity of reliable quantified data being made available to investors by companies.  The result of this is that very many companies that produce ESG (Environmental Social and Governance) research have to rely on the qualitative and partisan communications of companies.

As a consequence, BP is over represented in the majority of sustainable investment indices and investment strategies.  In the absence of quantified comparable environmental disclosures, researchers have come to rely on proxies for such information, such as the existence of environmental policies and public proclamations, such as those that Tony Hayward has made regarding the priority he has placed on environmental and human safety.  These proxies are demonstrably unreliable, which is why Trucost gives them no credence in its assessments.

Reliable data is very hard to find, particularly against the onslaught on highly skilled corporate communications executives.  Yet data on the environmental impacts of companies are what is needed and is the reason why Trucost exists to seek it out.

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