Investor Case Studies

Deepwater Horizon (2010) | Unearth Justice (2008)

Case Study One: Deepwater Horizon (2010)

On April 20th 2010 the ‘Deepwater Horizon' off-shore oil drilling platform leased by BP caught fire and sank, killing 11 men. The resulting oil spill spread to cover an area of several thousand square kilometres, making it the largest accidental spill in history. In addition to the tragic loss of life, the incident has had a devastating impact on the environment, the livelihoods of thousands of Americans, the share price of BP plc and the income of shareholders.

In the three weeks following the explosion, BP's share value fell by around £44 billion (1/3 of its value), and the direct costs to BP of the response and clean-up operation are already well in excess of $8bn. The sheer financial and political scale of the disaster forced BP to cancel its dividends. As yet the full costs of litigation, fines and environmental clean-up are unknown. Described by BP only as "sizeable", most estimates predict these costs will rise above the $20bn mark.

Along with the millions affected along the Gulf Coast, institutional investors in this country too are now suffering the consequences. BP is an enormously important stock for British pension funds and the financial ramifications of its precipitous drop in value, its cancellation of dividend payments and the very real threat of a long term drop in the company's profitability are clear.

Of course, while investors could not have been expected to foresee the precise circumstances of the Deepwater disaster, it does seem clear that there was sufficient cause for concern about BP's attitude to safety and environmental risk to have warranted more robust engagement from shareholders to safeguard their assets. BP has a track record of neglecting environmental and safety risks, and ultimately paying the price: the 2005 Texas City oil refinery explosion cost it $137m in fines alone, while in 2009 the US Occupational Safety and Health Administration proposed to levy a fine of $87m for alleged failures to rectify wilful violations of health and safety standards. The same year, BP successfully gained an exemption for the Deepwater Horizon operation from US legislation requiring an environmental impact analysis.

Adequate assessment and consideration of ESG issues can often be presented as being of only ethical value - however as the Deepwater disaster has illustrated, a failure to properly address and manage ESG risks by both BP's board and by investors in the company has resulted not only in an unprecedented environmental catastrophe but in massive financial losses. This demonstrates a clear need for investors to take steps to guard against such risks in the future.

Download Deepwater Investor Briefing

Case Study Two: Unearth Justice (2008)

FairPensions and international aid charity CAFOD joined forces in 2008, campaigning for investors to intervene in irresponsible mining companies that were uprooting communities and causing environmental devastation in places like Honduras, the Philippines and the Congo. The practices involved raised not only ethical questions, but serious business and financial questions also.

The boom in commodity prices in early 2008 saw investors rush to buy shares in the extractive sector (including mining companies). The price boom meant that mining companies were able to initiate projects in areas previously thought uneconomical because they were too remote, too dangerous or too politically unstable.

CAFOD found that many of these mining companies were not carrying out adequate risk assessments of the potential loss-making problems associated with expanding into these areas, including the risks of conflict, community opposition or reputational risk for the company. Irresponsible mining projects that disregard human rights and environmental factors are more likely to be disrupted or shut down, and thus represented a clear financial risk to pension funds.

FairPensions and CAFOD sent briefings to over 400 institutional investors worth trillions of pounds, and hundreds of people contacted their pension funds to demand they take action on irresponsible mining companies. This successfully put the issue on the agenda for individual pension funds and investor coalitions including the Local Authority Pension Fund Forum (LAPFF).

Download FairPensions' investor briefing | Download CAFOD's investor briefing