Stocks & Markets June 13, 2010, 8:10PM EST

Shareholder Activists Set to Drill Oil Companies

BP's Gulf disaster pressures energy companies to disclose more about environmental and safety compliance. How to account for catastrophic risk?

Story Tools

(This story has been updated in the fifteenth paragraph to include comment from BP.)

It may seem unthinkable that a company with so formidable a public image and financial track record as BP (BP) is fighting to save its reputation—and potentially, its very existence—less than two years after the oil industry logged its biggest-ever growth in profits. Reversals of fortune of this magnitude aren't as rare as we sometimes think. Recall how the tobacco giants wound up ceding enormous, profit-generating power to the U.S. government and how asbestos lawsuits forced such major industrial outfits as Johns-Manville into bankruptcy.

The common denominator linking BP with these companies is growing clear: They all failed to anticipate risks that could threaten their business foundations.

Now the tide has shifted with respect to how much thought mainstream investors are giving to environmental, social, and corporate governance (ESG) issues. Michael Passoff, senior program director for the Corporate Social Responsibility Program at As You Sow, a shareholder advocacy organization in San Francisco, has reviewed as far back as 1999 resolutions focused on corporate environmental issues that were being filed for the first time. "Nothing comes close to the support we're getting now," says Passoff.

A June 3 proxy vote that called on Layne Christensen (LAYN), a mining and production company, to produce a sustainability report drew support from over 60 percent of shareholders. Earlier resolutions regarding disclosures about coal ash at power producers CMS Energy (CMS) and MDU Resources Group (MDU) were supported by over 40 percent of each company's shareholders. Resolutions demanding greater disclosure by natural gas producers about their hydraulic fracturing practices have drawn supportive votes ranging from 26 percent to 41 percent of shareholders, five to six times what they've received in prior years, says Passoff.

He believes environmental sustainability issues had already begun to attract broader support before the Apr. 20 explosion of BP's Deepwater Horizon rig sent an estimated millions of barrels of oil gushing into the Gulf of Mexico. Passoff credits the change in consciousness to growing awareness of climate change issues. "Investors are seeing that environmental practices affect their bottom line. It's starting to become more commonly accepted," he says.

Environmental resolutions are drawing affirmative votes from pension funds such as the California Public Employees Retirement System (CalPERS) and from RiskMetrics, a proxy service that historically has tended to support management on ESG resolutions, says Passoff.

Other oil companies face same risks

On June 11, MSCI, a provider of stock indices and portfolio risk analytics, announced plans to include nonfinancial factors such as ESG in its investment products. MSCI acquired RiskMetrics Group on June 1.

There's undeniable risk that BP could declare bankruptcy as a result of the Gulf oil disaster, says Nell Minow, editor and co-founder of the Corporate Library, an independent research group. That BP is on the spot doesn't mean other oil companies are doing any better at planning for environmental debacles, she adds.

"If large fiduciary institutional investors who are going to own a piece of every company for a long time don't understand that they need to do a better job of monitoring risk and getting boards of directors to monitor risk," investors are better off "putting [all their money] in T-bills," says Minow.