The goal of this study is to determine the correlation between environmental performance and stakeholders’ SRI for these three companies and further CSR implications for the oil and gas industry and sustainable investment implications in the financial industry. Background of the Study In the past decade, environmental concerns regarding the exploration and extraction of oil have gained precedence in the oil and gas sector especially after BP’s 2010 oil spill in the Gulf of Mexico.
Environmental events such as the one mentioned, as well as climate change, have had huge impacts on credit risk analysis, in turn affecting decisions made by lending banks (Acclimatise, 2009). Combined with the growing interest in SRI, oil companies are at risk of losing funding from ethical investors owing to their poor environmental performance. Since SRI follows a framework that looks at areas of Environmental, Social and Governance (ESG), it focuses on longterm sustainable growth (Dow Jones, 2013).
Sustainable investments now are now focusing on the relationship between ethical, social and governance of shareholder value, which have a great correlation to a company’s share price (Stewart, 2012). In recent years, and in the wake of the negative publicity BP and Shell received over environmental events related to the extraction of oil (e. g. the Niger Delta disaster and the BP’s Deepwater Horizon oil spill in 2010), environmental groups such as 350 have begun a “fossil free” movement, urging institutions and individuals to divest from fossil fuel ompanies. However, crude oil is an inelastic commodity that mankind cannot survive without and currently there still is no alternative sustainable source of energy that can completely replace crude oil, ticking both economics and resource boxes (Van Vactor, 2010). The controversial question remains as to whether it is a viable solution to completely pull out of investing in oil and gas companies because of their poor environmental performance if we indeed need petroleum to survive.
Heated debate around this topic has spiked interest in the environmental performances of oil and gas companies, whose activities can have great environmental and social impacts; this ultimately affects SRI contributions to these companies, in turn affecting market share prices. From accessed journals and publications, there appears to be a large number of articles devoted to the relationship between CSR and financial performance, CSR failures and environmental regulations in the market (Sullivan, 2005) as well as Alison Leung A4052143 An Examination of the Financial Implications of Environmental Performance in BP, Shell and ExxonMobil elationship-building and the redefinition of CSR in host countries such as Nigeria (Ako et al, 2009; Ako 2002). Researchers have also looked at the basis of CSR and whether CSR initiatives are public relations stunts or purely altruistic in nature. In a piece of research on “new age activism” and using the Niger Delta as an example, Evuleocha in 2005 questioned stakeholders’ decision-making power in relation to CSR within a company. An analysis of CSR by Frankental in 2001 also raised questions about the benefits and beneficiaries of CSR efforts.
In addition, existing studies on sustainability and CSR have found a correlation between the level of CSR investment and financial performance. All of these seem to be in agreement with Arjalies’ findings in 2005 that SRI is rapidly growing in the investment sector and has been expanded and widely adopted by asset management companies, with companies rating high on the CSR scale more likely to attract stakeholders’ investments. In regard to environmental performance and financial performance, different definitions and indices have been used and results have been mixed.
These key literatures all point to a common theme: the environmental performances of oil and gas companies are under scrutiny and the growth of SRI may mean a withdrawal of funding streams to the petroleum industry. Not only do environmental concerns raise issues worldwide for the oil and gas company, with significant socioeconomic implications, environmental performances, but CSR and SRI are intricately linked to each other and have great ripple effects in the whole petroleum industry, with strong implications for the funding and oil and gas companies receive, in turn affecting share prices.
This background will serve as basis to investigating the degree of correlation between environmental performance to SRI and their effects on a company’s share prices and an examination of how different aspects of environmental, sustainability and investments are connected.
This study will be conducted using a mixed research design incorporating a quantitative comparative analysis on the historical data of environmental performance within BP, Shell and Exxonmobil; as well as a qualitative exploratory analysis of interviews with environmental/Corporate Social Responsibility (CSR) and investment managers as well as representatives from international oil and gas associations.
Industry Background Although the discovery of petroleum occurred in 1859 in the US (Wieblitz and Comazzi, 2006), oil did not become the world’s primary source of energy until the second half of the twentieth century, due in large part to the mass discovery of oil in the Middle East that boosted attention and popularity of oil and gas around World War II (Van Vactor, 2010). The oil industry has had its ups and downs, including an oil crisis in the 1970s with the Arab embargo to the United States, The Netherlands and many other countries as well as the energy crisis in 2008 that hugely affected the price of oil.
In the 1960’s, OPEC (Organization of the Petroleum Exporting Countries) was set up to establish industrial standard providing information and pricing strategies to the industry. In the past few decades, oil and LNG (Liquefied Natural Gas) have become attractive tradable commodities and have been Alison Leung A4052143 An Examination of the Financial Implications of Environmental Performance in BP, Shell and ExxonMobil maintaining a steady yearly growth (Fusaro, 2002). As global citizens saw the financial potential of petroleum and the political and financial power that etroleum provides, International Oil Companies (IOCs) and National Oil Companies (NOCs) alike began to aggressively explore, source, market and distribute oil and gas. Private independent companies began to grow in both the upstream exploration and production of oil and downstream refinery and marketing of oil (Van Vactor, 2010). As the industry grows, this growth has brought with it significant environmental concerns regarding the extraction and transportation of this commodity.
Oil companies are eagerly investing in research and development in an effort to find ways to increase the number of oil reserves. In this particular research paper, the researcher will look at how the environmental performances of BP, Shell and ExxonMobil govern the level of SRI, affecting the share prices of these companies. RESEARCH AIM AND OBJECTIVES Research Aim This study aims to show the extent to which environmental performance affects SRI and share prices of BP, Shell and ExxonMobil.
Research Questions The study attempts to answer the research question: 1. What is the correlation and impact of the environmental performance to SRI and share prices in BP, Shell and ExxonMobil? Hypotheses 1. The researcher hypothesises that environmental performance is positively correlated to the existence and level of SRI and share prices in BP, Shell and ExxonMobil. Objectives The study has five major objectives: I. II. III. IV. To critically analyse the past and current environmental performance of BP, Shell and ExxonMobil.
To critically analyse historical data on SRI in BP, Shell and ExxonMobil To critically analyse historical share prices of BP, Shell and ExxonMobil. To compare and draw a correlation between SRI and market shares and profitability in relation to the environmental performance of BP, Shell and ExxonMobil. To determine operational implications for the oil and gas sector in adapting a holistic approach when adhering to environmental performance standards, and to consider CSR implications in business decisions. V. Alison Leung A4052143
An Examination of the Financial Implications of Environmental Performance in BP, Shell and ExxonMobil LITERATURE REVIEW Definition of Environmental Performance The United States Environmental Protection Agency (2013) defines environmental performance as “The measurable results of the environmental management system, related to an organization’s s control of its environmental aspects, based on its environmental policy, objectives, and targets. ” There are many management systems and frameworks that govern the assessment of a firm’s environmental performance.
The most notable organisation is the International Organization for Standardization (ISO). This body sets out environmental management standards (ISO 14000 series) that include requirements and guidelines from environmental communication to measurement to Greenhouse Gas (GHG) emissions reduction (International Organization for Standardization, 2013). There are many environmental performance indicators, all of which contain categories and subcategories of assessment in evaluating a firm’s environmental performance.
Environmental Performance Index (EPI) offers an evaluation system across categories that include environmental, public health and ecosystem vitality with 25 Key Performance Indicators (KPI) (Yale University, 2013). As criteria may need to be adjusted in different industries and countries, it can be seen that many other environmental performance management systems or indicators are at use at the moment (e. g. , the National Australian Built Environmental Rating System, and the Performance Rating and Information Disclosure on the Environment (PRIDE) scheme utilised in Asia and now parts of Eastern Europe).
In Europe, an initiative called the Eco-Management and Audit Scheme (EMAS) has also been set up to help companies track their environmental performance. With regard to sub-scoring criteria, James in 1994 developed a framework for environmental performance measurement and has identified six key areas of interest for assessment – production, auditing, ecological, accounting, economic and quality – and has argued that environmental performance comprises a large variety of factors that involve environmental topics, organizational and management issues, global and personal contributors (1994).
Definition of SRI According to Sparkes, Socially Responsible Investment (SRI) is synonymous with what was previously referred to as ethical investment. It describes the investment decisions that derive from combining ethical and environmental goals with the aim of maximising return in the long run (2002). Socially responsible investing can also be described as an “investment process” in which the outcome of the investment is Alison Leung A4052143 An Examination of the Financial Implications of Environmental Performance in BP, Shell and ExxonMobil nalysed based on social and environmental values (Kugler, 2005 cited in Betz, 2009, p. 112). Hancock (2005) stated that SRI objectives are two-fold: determining the social values of a company and making an investment with preferred values in gaining good investment returns. The roots of SRI can be traced back to the 18th century as part of a religious movement in which investors refrained from trading with companies that were involved in “sin-related” activities such as gambling or prostitution (Broadhurst, Watson and Marshall, 2003).
Following events such as the Chernobyl accident and the Exxon Valdez oil spill, SRIs began to gain much more traction. Beginning in the 1960s and 1970s, many investors refused to invest in funds that were related to the US’ military involvement in Vietnam (Waring and Lewer, 2004). SRIs were institutionalised beginning in the 1980s (Broadhurst, Watson and Marshall, 2003).
SRI initiatives could be individual or institutional, with shares or stocks held by these designated parties with the expressed aim of making financial gains from companies that hold principles that are deemed ethical (Ransome and Sampford, 2010). SRI investments are generally managed by fund managers and investors can usually select a number of companies to comprise one SRI investment portfolio (Ransome and Sampford, 2013). Sparkes and Cowton in 2004 conducted a review of SRI and concluded that not only has SRI grown, but it has matured and entered the mainstream investment arena.
An increasing number of individuals are placing investments (including pensions and insurance) into SRI which has great implications for the Corporate Social Responsibility (CSR) arms of companies and has played a major role in CSR investment by listed companies (Sparkes and Cowton, 2004). SRI can be evaluated through a positive and negative screening process (Kemp and Osthoff, 2006). Negative screens exclude all companies presenting investment opportunities that are involved in socially and/or environmentally contentious business practices (e. . alcohol, tobacco, firearms, weapons etc. ); while positive screens include companies that demonstrate strong environmental or social governance in their business practices and score highly in the Environment, Social and Governance (ESG) scale (e. g. employee relations, community and environment) (Kemp and Osthoff, 2006). FTSE4Good ESG Ratings (2011) have organised a list of assessment criteria in evaluating a company’s performance in each of the environmental, social and governance areas.
Each of them is assessed under areas of Public Policy, Management Systems and Public Reporting. They include: ? ? ? ? ? ? Environmental Management Climate Change Human and Labour Rights Supply Chain Labour Standards Countering Bribery Corporate Governance Alison Leung A4052143 An Examination of the Financial Implications of Environmental Performance in BP, Shell and ExxonMobil A list of value-based exclusion criteria can be found in MSCI’s Global Socially Responsible Indices (2012).
SRI negative screening process will exclude any companies that have any relations with any of the following interests in their business practices: o o o o o o o o Alcohol Gambling Tobacco Military Weapons Civilian Firearms Nuclear Power Adult Entertainment Genetically Modified Organisms (GMO) Literature Review Many studies aimed at assessing the relationship between Corporate Social Responsibility (CSR) and financial performance found a positive correlation between the two (Hillman and Keim, 2001; Margolis and Walsh, 2003; Hill et al 2007) with a small number of study findings yielding mixed results.
In this study, the researcher is interested in the literature review of environmental performance as well as SRI and their relationships to financial performance. Sahay and Singh (2004) conducted an empirical analysis of Indian firms and found that although the firms’ environmental reporting is amongst the highest in the oil and gas sector, the researchers were unable to find any coherent correlation between environmental and financial performance in companies across all sectors. When looking at orporate social performance, which may include a firm’s environmental indicators and its relationship to financial performance, findings have been completely mixed out of 109 studies they have examined (Orlitzky et al, 2003) Molina-Azorin et al (2009) examined 32 studies using different environmental variables (including environmental management standards ISO 14000 and ISO 14001), and although they found a positive association between environmental performance and financial performance (ROA, ROS, ROE, stock price and company profits), final findings yielded mixed results.
They cited the work of Wagner et al in 2002 and suggested that environment and financial performance have a two-way relationship and either one could affect another. Edwards (1998) made 1,200 direct comparisons between “green” and “non-green” companies (criteria assessed by Jupiter Asset Management) and concluded that there was a positive correlation between environmental and financial performance in industries including those in the oil and gas sector. Alison Leung A4052143
An Examination of the Financial Implications of Environmental Performance in BP, Shell and ExxonMobil Rosso and Fouts (1997) examined environmental performance using Franklin Research and Development Corporation (FRDC) ratings where rating categories included indices such as environment compliance records, waste reduction levels to the support of environmental protection schemes. They found that there was a correlation between environmental performance based on FRDC indexes and firms’ profitability (ROA) across industries.
While most of the abovementioned literatures indicate a positive correlation between environmental performances and financial performance, suggestions made by Nehrt (1996) argue that these findings could be the result of improved supply chain and logistics processes, causing operations to be more environmentally sound, leading as a result to better financial performance. Porter (1991) suggested another possible reason for better financial outcomes is the positive effect that environmental regulations have on firms’ overall performance in other areas such as productivity and innovation.
Reciting Klassen and McLaughlin (1996), Reed (1999) and Wagner (1999), Hester and Harrison in 2002 provided an insight that may isolate other dependent variables when analysing the relationship of environmental performance to financial performance: they broke environmental performance down to different areas of analysis and found that a stock’s performance is hugely dependent on the public news and knowledge of a firm’s environmental performance. Research studies have not touched base on the effects climate change have on financial performance except for industrial reports prepared by industrial organisations.
A report written by Acclimatise (2009) raised the subject of changing climates being an impactful factor in the oil and gas factor which have major financial implications on proved oil reserves. Furthermore, the report stated oil companies only calculate extreme environmental events into risk management without taking into account the ever changing climate. Based on studies with BP, Shell, Tullow Oil and BG Group, Acclimatise also suggested the crucial importance in understanding and incorporating incremental changes to the climate to a company’s financial performance (2009).
It appears the gaps in the research of business practice in the oil and gas industry from research findings are the inability for companies to comprise an overall sustainable performance including all areas of environmentalsocio impact, carbon, water, waste and energy, instead of looking at separate issues in each of these subcategories. In the research related to SRI, Michael (2009) analysed SRI to pension funds in Turkey and concluded that SRI growth and regulation will be affected by criteria in the SRI indices.
A semi-related finding that supports the importance of environmental influence to financial performance could be backed by a report prepared by Sullivan et al (2009) where their findings suggested great investment implications a changing climate may have from potential investors. Alison Leung A4052143 An Examination of the Financial Implications of Environmental Performance in BP, Shell and ExxonMobil In the research related to SRI, Michael (2009) analysed SRI to pension funds in Turkey and concluded that SRI growth and regulation will be affected by criteria in the SRI indices.
In summary, due to the difficulty and the varied definitions by individuals of “environmental performance” and “financial performance”, the validity and reliability of studies in environmental performance’s positive (negative) correlation to financial performance are called into question (Howard-Grenville, 2007). For example, although Margolis and Walsh (2003) examined 127 studies from 1972 to 2002 and found a small linkage between corporate positive environmental performance and positive finance performance, it must be noted that the study was conducted with the employment of over forty accounting measures.
There is as yet no conclusive explanation as to why or how a higher environmental performance is linked to a positive financial performance. A few studies have investigated in detail how the specifics of certain environmental strategies or indices lead to better financial outcomes (Vogel, 2005) but findings have been inconclusive. This dissertation fits directly onto the debate of literatures in that it attempts to provide a linkage between environmental performance and financial performance, offering the variable of SRI as the mediation factor between the two.
In this study, the author will look at specific environmental indicators correlating to financial performance. The existing literature, as mentioned above, does not seem to include climate change risks, maintenance correlated and personnel training etc. into the scoring criteria of “environmental performance”; in the reviewed literature, it must be noted, the definition of “financial performance” also varied, and included (variously) profitability, different financial ratios, and return on assets to stock prices.
As there is a lack of research on the added environmental factors mentioned and their relationships to share prices and profitability, the researcher will attempt to address a correlation between environmental performance and financial performance with clearer parameters, using a systems view method, and will attempt to fill this research gap in identifying the role SRI plays. RESEARCH METHODOLOGY Introduction There is an extant body of research on SRI and its financial implications in the oil and gas industry.
This research study will outline and compare historical environmental performance in BP, Shell and ExxonMobil and its correlation to SRI and market share prices. This study will employ a mixed research design method. A qualitative exploration analysis will be used in in the form of interviews to gain indepth knowledge and information of the proposed area of interest. A quantitative comparative analysis will be used in comparing historical data in SRI and environmental performance for BP, Shell and ExxonMobil. Alison Leung A4052143
An Examination of the Financial Implications of Environmental Performance in BP, Shell and ExxonMobil Research Design / Proposed Method According to Marczyk et al (2005), research design is a plan in which research is conducted with the aim of answering the question of interest. A descriptive research design is used in this study and is a “fact-finding” endeavour (Richey and Klein, 2007). It is best suited for the research questions in hand in which it information is used in devising hypotheses; it is a type of research that cannot be tested or verified but simply analysed and evaluated (Monsen and Van Horn, 2008).
For the purpose of answering the proposed descriptive research question, a mixed research design method of descriptive qualitative and descriptive quantitative will be used. A quantitative comparative analysis will be used to analyse historical data on environmental performance, while a descriptive qualitative exploratory analysis will be used to gain in-depth information on current industry definitions of environmental performance, and approaches to and views of SRI in the oil and gas sector.
Qualitative approaches to the treatment of data allow for in-depth analysis of openended data, such as interviews, and it provides room for interpretation (Creswell, 2003); while quantitative research design use a more formal and systematic approach with the incorporation of the analysis of numerical values, best suited for answering quantitative types of research questions (Marczyk et al, 2005).
Sampling The researcher intends to acquire a purposive sample by recruiting experts in the oil and gas sector as well as individuals involved in environmental and/or Corporate Social Responsibility (CSR) programmes within BP, Shell and ExxonMobil. A total of nine individuals will be approached for interviews. The breakdown of the interviewees is as follows: 1) 2) 3) 4) 5) 6) 1 x Environmental, CSR or Investors Relations Manager/Head at BP 1 x Environmental, CSR or Investors Relations Manager/Head at Shell 1 x
Environmental, CSR or Investors Relations Manager/Head at ExxonMobil 1x Sustainability, CSR and Climate Change expert 1x Upper Management of International Association of Oil & Gas Producers 1x Upper Management of International Petroleum Industry Environmental Conservation Association 7) 1x Upper Management of Society of Petroleum Engineers 8) 1x Environmental, Social and Governance Investment Consultant 9) 1x Representative from FTSE4Good or Carbon Disclosure Project An initial email will be sent to prospective interviewees as an introduction and invitation to the research study.
A follow-up telephone call will be conducted within 48 hours for a short discussion explaining to interviewees the purpose of the study and the structure of the interview. A letter of consent will be distributed and collected. Letters of invitation will be sent in explaining the premise and scope of the Alison Leung A4052143 An Examination of the Financial Implications of Environmental Performance in BP, Shell and ExxonMobil research study and contact information for interviewees to clarify any questions. This letter of invitation will be the consent form, which will be returned to the researcher prior to the commencement of the interviews.
An interview time will be discussed and arranged according to interviewees’ schedules, and is expected to be completed within three weeks of the initial invitation letter being sent out. Data Collection Open-ended, semi-structured, in-depth interviews will be used to allow participants to freely discuss their views, experience and knowledge of the subject at hand in this qualitative part of the study. Semi-structured interviews will be prepared with designated questions targeting specific areas of SRI in the oil and gas sector.
Interviews will take place either face-to-face or over the telephone when circumstances would not permit a face-to-face interview. The interview questions will comprise six open-ended questions uniquely developed by the researcher in the topic of SRI and environmental performances in the oil and gas sector. It is estimated that the interviews will last approximately forty-five minutes. The interviews will be audio-taped with the permission of the participants for further analysis at a later time. A copy of a list of interview questions can be found in
Appendix II. Data Analysis “Data” is information; facts that have been collected. It comes in many forms. The purpose of data analysis is to answer the research question of interest (Mirkin, 2011). According to Mirkin, quantitative data can be analysed by the calculation of descriptive statistics while qualitative data can be analysed through data display and conclusion drawing and verification (2011). “Data analysis” is the process of calculating various conclusions and generated understandings from any given set of data (Mirkin, 2011).
Data analysis for this study will begin with a transcription of interviews. Full length of the interview will be transcribed verbatim using this thematic descriptive data analysis. Following the thematic analysis, the researcher will break down steps of the analysis to six phases: i) ii) iii) iv) v) vi) Data familiarisation Codes generation Themes search Review of themes Defining and naming of themes Drawing of conclusions In citing from Boyatzis, 1998, thematic analysis is a process of coding and interpreting data with the goal of deriving conclusions from grouped themes (Klenke, 2008).
Thematic analysis is used in this study because of its clear and easy to follow Alison Leung A4052143 An Examination of the Financial Implications of Environmental Performance in BP, Shell and ExxonMobil coding procedures (e. g. , categories, classifications associated with assigned words) with drawing themes from direct observables and the underlying message in the descriptive data (Klenke, 2008). TIMESCALE The timescale from start to finish for this research is 15 weeks. Two extra weeks are reserved at the end for review and unexpected delays. A full timescale table is presented in the appendices (see appendix I).
RESOURCES Resources used for this dissertation include journal articles, books, magazine articles, workshop presentations, interviews and news articles. Internet access will be available at the researcher’s private living accommodation, the British Library as well as various cafes. Alison Leung A4052143 An Examination of the Financial Implications of Environmental Performance in BP, Shell and ExxonMobil REFERENCES Acclimatise, 2009. Carbon Disclosure Project Report 2008 [pdf] Available at: http://cssa. asu. edu/sites/default/files/IBM%20Carbon%20Disclosure%20Project%20 Report%20Oil%20and%20Gas. pdf> [Accessed 4 May 2013]. Ako, R.
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