Information on BP PLC's declining health and safety record was insufficient to prompt money managers to sell the stock ahead of the April 20 Deepwater Horizon oil rig explosion and subsequent Gulf of Mexico spill, according to investment consultants, managers and ESG experts.
“Managers with sophisticated ESG antennae probably couldn't have avoided or minimized the financial effects of the BP spill on their portfolios,” said Emma Hunt, Reigate, England-based senior investment consultant in Towers Watson & Co.'s sustainable investment team. “But they will be better able to respond if and when the next environmental catastrophe happens.”
That's because managers that have watched the BP spill closely from an environmental, social and governance perspective will be better able to judge how well companies respond to future disasters — be they environmentally, socially or governance-driven.
Also, the BP disaster will cause managers and investors to become more aware of how ESG-related risks can be material to a company's performance, experts say. This will drive managers and investors to pay closer attention to ESG risks and to push for changes in areas such as corporate disclosure that might help investors better understand ESG risks.
Of course, nobody can predict when an accident will happen. And even trying to predict which company might be more at risk of a disaster than its peers is nearly impossible statistically because disasters are so rare, said Ran Fuchs, global head of ESG analytics at RiskMetrics Group Inc., New York.
“We can't predict these kinds of events, but we can see how companies” are prepared to deal with them, he said. So the question is not which company is more or less likely to have a disaster. “The real question is how prepared a company is when a disaster like this happens,” Mr. Fuchs said.
ESG experts say it's clear that BP was not well prepared for a deep-water oil-rig disaster — but neither were analysts or investors.
“It's quite important to say that corporate reporting on environmental, social and corporate governance risks needs to improve,” said Duncan Exley, director of campaigns at FairPensions, a London-based non-profit organization that lobbies for responsible investment.