Royal Dutch Shell Group .com Shell and BP Top Innovest CSR Ratings of Integrated Oil and Gas Companies: “The scandal, which involved executive foreknowledge of the mistaken statements, resulted in a significant downgrading of Shell to a three on a scale of ten on the "Traditional Governance Score" assigned by Innovest Strategic Value Advisors in its recent Integrated Oil and Gas Industry Report.” (


By William Baue

Posted 14 Oct 04


Marathon and several companies operating in emerging markets sink to the bottom of the rankings of corporate social responsibility performers. -- How has the January 2004 restatement by Shell (ticker: RD) reducing its proven oil reserves by 20 percent affected its standing as a corporate social responsibility (CSR) leader? The scandal, which involved executive foreknowledge of the mistaken statements, resulted in a significant downgrading of Shell to a three on a scale of ten on the "Traditional Governance Score" assigned by Innovest Strategic Value Advisors in its recent Integrated Oil and Gas Industry Report. Similarly, BP (BP) is the target of widespread stakeholder opposition to its lead role in the Baku-Tblisi-Ceyhan (BTC) pipeline. The pipeline could adversely affect Kurds according to human rights activists, and sturgeon stocks in the Caspian according to environmentalists.



However, Shell and BP remain two of the top overall CSR performers in Innovest's recent integrated oil and gas industry report, along with Suncor (SU), illustrating how strong CSR performance encompasses a broad range of activities. CSR laggards identified by the report include Marathon (MRO) and several companies operating in emerging markets, such as PetroChina, Yukos, and Surgutneftegas. And, as is the case in the almost every other sector examined by Innovest, the CSR leaders financially outperformed the CSR laggards, supporting a business case for addressing social and environmental issues.


"The report clearly shows that over the longer term oil and gas companies with above average ratings outperform those with below average ratings," said Hewson Baltzell, president of Innovest. "Between 1996 and 2004, the higher-rated companies outperformed lower-rated companies by 38.6 percentage points (3860 basis points)."


Shell earned a AAA EcoValue21 rating, which assesses 60 environmental aspects, and a AA Intangible Value Assessment (IVA) rating, which assesses 80 social aspects (both ratings mimic bond ratings, ranging from AAA to CCC). BP and Suncor both earned AA EV21 and AAA IVA ratings. Marathon earned a B on the EV21 rating and a BB on the IVA rating, while Surgutneftegas received a CCC on the EV21 rating and a B on the IVA rating; Yukos earned a CCC on both ratings.


Innovest groups companies earning BBB and above into a leaders portfolio and compares that portfolio’s financial performance on a monthly basis to a laggards portfolio filled with companies earning below BBB. While the leaders portfolio outperformed the laggards portfolio throughout the study period, the financial performance differential between the two portfolios varies over time. For example, the CSR laggards portfolio caught up to within 1.6 percentage points in August 2003.


"During that month, we had added coverage of a number of emerging markets companies, notably Surgutneftegas and Yukos, each of which we give below BBB ratings and each of which performed very well that month (especially Yukos, with a 26.6 percent total return)," the report notes.


By the same token, Shell financially underperformed the integrated oil and gas sector from January 2001 through November 2003, according to a chart in its EV21 rating. In other words, Innovest is not positing a one-to-one correspondence between CSR performance and short-term financial performance at individual companies. Rather, it is tracking long-term correlations between the CSR performance and financial performance across industry sectors.


The report highlights the major challenges confronting the industry, which include escalating climate change risk, corporate governance scandals, and the shift towards new, lower impact products.


"Leading companies are taking proactive measures to address these issues," said Juan Silva, Innovest’s oil and gas senior analyst. "For example, some are reducing their exposure to climate change risk by investing in renewable energy projects and by developing natural gas and cogeneration."


"They're also recognizing carbon costs in their business strategies and new project development," he continued.


CSR leaders such as Shell, BP, and Suncor are all addressing climate change in significant ways. However, laggards such as Marathon and Lukoil are not.


"Marathon Oil and Lukoil have neither reported their position on climate change nor their corporate strategy to minimize exposure to related regulations," the report states.


Marathon and Lukoil both earn zeros on Innovest's "Climate Change Risk Abatement Strategies Score," a subcategory similar to the "Traditional Governance Score." 


RELATED ARTICLE Report Rates Environmental Record of Leading Oil Companies:A new survey by Innovest finds Royal Dutch/Shell in the lead for addressing environmental challenges. (


August 23, 2000 -- With rising concerns over global warming, air pollution, and oil spills, few investors would classify any petroleum company as "green." But a recent report from Innovest Strategic Value Advisors, a New York-based, specialized investment advisory firm, will help concerned investors discriminate between environmental leaders and laggards within the petroleum industry.


"The Petroleum Industry: hidden risks and value potential for financiers and investors" is Innovest's latest industry sector report, highlighting the environmentally-driven risks and opportunities found in the 13 oil companies of the S&P 500. The survey found Royal Dutch/Shell at the top of the pile, in terms of environmental performance, with BP Amoco placing a close second.


"Shell and BP have superior environmental management programs, particularly the level of engagement in sustainable development and triple bottom line issues," said Dr. Martin Whittaker, Senior Analyst at Innovest. "They were also considered to be particularly strong with respect to renewable energy development programs, corporate social responsibility, and climate change."


Innovest used its proprietary EcoValue 21 environmental rating methodology to assess the relative environmental performance, or "eco-efficiency," of the 13 companies. The rating is based on more than 60 different aspects of environmental risk, opportunity, and management, including positions on climate change, renewable energy, fuel cells, natural gas, emissions, and social management in international operations.


While Shell and BP Amoco's top rating may come as no surprise to investors, Innovest also gave high marks to Exxon, considered one of the most entrenched oil companies for its patent denial of the evidence supporting global warming. According to the report, Exxon has been motivated by the Valdez oil spill, ten years ago, to develop a respectable environmental management framework to reduce environmental impacts and improve performance.


At the other extreme, Unocal, Occidental, and Canada's Imperial Oil received low ranks for their above average industry risk exposure and a below average management capacity to control risk. Unocal's performance could improve in the future, according to the report, due to its relatively high reliance on natural gas production and its good position to capitalize on environmentally-driven business opportunities.


Innovest recognizes that environmental performance is a double-edged sword, combining the challenges of environmental risk with the opportunities of environmental innovation and competitive advantage. In the case of the oil industry, that means understanding and responding to the changing dynamics of the global energy business, including alternative fuels and renewable energy sources.


Texaco, for example, has expertise in waste gasification that they are marketing to others. Only BP Amoco and Shell, the leaders in Innovest's survey, have made serious commitments to renewable energy sources. Shell plans to capture 10 percent of the estimated $1 billion solar market by 2005, investing over $500 million over a 5-year period to achieve this.


In every sector rated by Innovest so far, companies receiving above average ratings outperformed below average companies by 3 to 18 percent, as measured by total stock market return, suggesting the power of their model to project stock market performance. The oil industry is no exception, with above average companies outperforming companies with below average ratings by more than 17 percent over the past year.


Oil companies have particularly wide variations in environmental risk exposure and environmental management capability, according to the report, with profound economic implications not captured by conventional analytical models. The future stock market performance of leaders and laggards will likely diverge further, as environmental regulations and public concerns about the environment continue to increase.


Concerned investors will find Innovest's report a valuable indicator of future performance in the oil industry based on environmental criteria. "There are a whole bunch of issues relating to business risk, management quality, and strategic opportunity that are largely unrecognized by traditional investment analytical tools but that can and do exert influence on a company's profitability and future stock market performance," said Whittaker.

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