Engaging BP and Other Energy Companies: Protecting the Financial Interests of Our Participants

On Your Behalf—July 2010

Consideration of environmental, social and governance (ESG) issues has long been an important element of the investing program of the General Board of Pension and Health Benefits (General Board). We believe companies that ignore or violate sound ESG practices ultimately compromise financial returns and shareholder value.

The Church has been aware of the importance of these non-financial factors for some time. Resolution 4071 (first adopted by General Conference in 1992) clearly states “that social justice and social usefulness must be given consideration together with financial security and financial yield in the investment of funds.” Like other socially responsible investors, the Church believes that shareholder value and financial yield are very much dependent on both financial and non-financial (ESG) factors.

Investment in Energy-Related Companies

The Social Principles do not discourage the purchase of energy company securities. (Existing investment screens include alcoholic beverages, tobacco, gambling, pornography and weapons.) Consequently, the General Board owns shares of stock in many oil, coal, gas, wind power and solar power companies. The oil, coal and gas industries have a particularly large environmental footprint. Many companies in this sector have been criticized for excessive environmental damage, high greenhouse gas emissions, insensitivity to local and indigenous communities and disregard for state and federal regulations and best safety practices. To socially responsible investors, these criticisms suggest that such companies are not operating sustainably or in the best interests of shareholders.

BP is a case in point. Two months after the fatal oil rig explosion, shareholders saw the value of their BP shares more than halved. Some observers predict that the final cleanup cost to BP will exceed $40 billion. While it is unlikely that the consequences of the oil spill will force BP into bankruptcy, the long-term implications for company operations—and the oil industry as a whole—are significant.

The General Board has actively promoted sustainable business practices in the energy industry through the use of traditional shareholder advocacy tools, such as proxy voting, shareholder resolutions and corporate engagement, to bring ESG issues to the attention of companies. We can point to many cases where our efforts have resulted in change, with positive results for both shareholders and stakeholders. Examples include Allegheny Energy and Dominion Resources, two electric companies. Following our filing of shareholder resolutions, both companies agreed to engage in dialogue to find ways to reduce greenhouse gas emissions and provide shareholders with important environmental data.

Additional Concerns with BP

Shareholder concern with BP’s environmental record goes well beyond the current Gulf oil spill. ECOFACT AG, a European consulting firm specializing in environmental, social and reputational risks and a UNPRI signatory, has identified BP as one of the 10 most environmentally and socially controversial companies. Their list of concerns includes the following:

• an explosion at BP’s Texas City, Texas facility in 2005 that killed 15 and injured close to 200;
• fines levied against BP for failing to correct the problems that led to the Texas City explosion;
• a 2007 award of $100 million in punitive damages for injuries received from exposure to toxic substances at the Texas City plant;
• a UK Joint Committee on Human Rights report that alleged that BP violated the human rights of Colombian farmers while the Ocensa pipeline was being built; and
• exposure to benzene (a cancer-causing chemical) at the Whiting, Indiana refinery.

BP and Oil Sands

Late in 2007, BP announced it would begin mining operations in the Canadian oil sands of Alberta.

Canada’s oil sands rank behind Saudi Arabia in proven oil reserves, with a total of 1.7 trillion barrels. Producing this oil, however, is costly and environmentally destructive. A 2010 report from Ceres, a national coalition of investors, environmental groups and other public interest organizations dedicated to working with companies on sustainability issues, described oil sands mining this way:

The Ceres report concludes that “oil sands investment is not without significant risks. Companies should proceed with caution and make clear plans for managing risks associated with carbon emissions, water scarcity and land reclamation.”

The Ceres report reflects the concern of many socially responsible investors. During the 2010 proxy season, shareholder resolutions on the risks associated with oil sands mining were filed with ConocoPhillips, Royal Dutch Shell and ExxonMobil. The ExxonMobil resolution received 26% of the shareholder vote and the ConocoPhillips resolution received 23%.

The General Board has concluded that oil sands mining poses unique risks to companies, which potentially could degrade shareholder value. We maintain that companies interested in such mining must thoroughly research and understand the possible consequences of their operations before venturing further into this sector of energy production.

The UMC and the Environment

The United Methodist Church has spoken resolutely on environmental and energy issues. General Conference has acted to:

• oppose mountaintop removal coal mining (Resolution 1021, first adopted in 2000);
• condemn environmental racism [locating, for example, toxic waste dumps in minority neighborhoods] (Resolution 1025, first adopted in 1992);
• call for the reduction of greenhouse gas emissions (Resolution 1031, first adopted in 2008);
• oppose energy policies that exploit the lands of indigenous peoples (Resolution 1001, first adopted in 1980);
• call for the development of alternative and renewable sources of energy (Resolution 1002, first adopted in 2004); and
• encourage the development of investment guidelines that promote adherence to high standards of environmental accountability (Resolution 1023, first adopted in 1992).

These resolutions articulate the Church’s theological understanding of environmental issues, but socially responsible investors know that they also make good business sense. Companies that flagrantly violate sound environmental practices are simply not sustainable and threaten long-term shareholder value. The General Board will continue to engage with energy companies, not only to honor the Social Principles, but also to protect the long-term viability of the pension program we administer on behalf of our many participants.