4th June 2010
One of the strongest arguments for ethical investment has been that it has its own in-built risk management.
BP's recent environmental disaster and the billions it has wiped off the share price seem to demonstrate the validity of this argument.
Would investing ethically have spared the pain in this case?
It is possible that ‘lighter' green funds were still invested in BP. Instead of disinvesting from ‘unethical' stocks, these funds aim to engage with companies to improve their corporate behaviour.
The trouble is that BP has really talked the talk on environmental issues. From its ‘Beyond Petroleum' marketing campaign to the lengthy environmental policy on its website, the group gave every sign about being on top of ethical issues.
This links to the group's environmental policy on its website. It talks about the group's operating system for ‘delivery of safe, responsible and reliable operating activity'. It even has an interactive sustainability mapping tool.
However, it is clear than many ethical funds looked deeper and did steer clear of the group. This article from Reuters takes comment from a number of groups who claim to have avoided the stock on environmental grounds.
This may not have been because they had the foresight to see the current disaster, but simply because they didn't like the environmental risks the group was taking.
Plenty of ethical managers have been put off by BP's tar sands projects in Canada, as reported here by the BBC.
Certainly, there has always been plenty of information available on BP's shaky environmental record, as this article in The Independent shows. After all, this is not the first time BP has been in hot water over this type of problem.
Ian Fraser, an environmental blogger, quotes UK-based charity Fair Pensions when he says that pension funds have only themselves to blame for not paying sufficient heed to environmental issues: "It accuses pension investors of being blind to non-financial indicators, and therefore oblivious to the true risks associated with investing in an oil giant like BP.
"Fair Pensions has been highlighting the weaknesses of BP's risk management, its penchant for low-cost solutions, and investors' negligence of non-financial risks for some years. Most of the earlier crises at BP have stemmed from its obsession with driving down costs".
The Fair Pensions site is also unequivocal in its condemnation. It has information going back some way on the problems at BP.
In other words, if an ethical manager was doing his job, there is no way they could reasonably have invested in the stock.
One final comment comes from DeathbyMauMau on the Guardian site, who cites a 1972 book Limits to Growth, which suggests that the environment will ultimately be the downfall of these groups.
"This is an early attempt at computer modelling the economy, with the unusual assumption of finite environmental resources included in the model.
"One of its predictions was that as resources such as oil ran out, we would end up making such a mess of the environment trying to get at it, that it would either become uneconomical, or that the situation might even arise where standards of living fell as the economy expanded.
"The events in the Gulf of Mexico fit this quite well – BP are drilling in deep ocean because all the easy-to-get-at oil is gone. It's screwed up the environment trying to get it and billions have been wiped off its share price (and people's pension funds to boot)."
Ultimately, investing ethically may well have spared the pain in this case. Certainly, if this book is to be believed, it will spare significant pain in the future.