NSMF participant, Raj Thamotheram, comments in today’s FTfm on the implications for institutional investors of the Gulf of Mexico oil spill. Raj and another NSFM participant, Maxime Le Floc’h, are co-authors of a report on safety in the oil and gas sector which will be published soon by the Network for Sustainable Financial Markets .
Commenting on the recent report from the US National Oil Spill Commission, Raj says: "its analysis is unbalanced in one important respect: it ignores the investment community, which is particularly surprising given that one commission co-chair is closely associated with the investment world."
Raj goes on to say that academic and empirical data shows how investor opinions are important and reminds readers that traditional sell side and credit rating agency analysts who covered BP largely ignored safety issues before June 2010.
Highlighting that there is enough blame to go around all parties he says "BP clearly has some soul searching to do to get to grips with the cultural reasons for its persistent safety failures. But the sector as a whole comes in for some hard criticism too. The Commission documents how the American Petroleum Institute has repeatedly undermined safety improvements. That a proposal for systemic risk management, which had been attempted under several administrations, only became law after the spill says it all."
Given the regulatory capture, as evidenced by the fact that the United States has the highest reported rate of fatalities in offshore oil and gas drilling amongst its international peers, but the lowest reporting of injuries, he welcomes the recommendations directed at government – to benchmark against international safety regimes, and remove conflicts of interests within the regulator itself. And he also endorses the Commission's call to the industry to up its game, which includes creating a “best practice” safety institute.
Focusing on institutional investors, he suggests the Commission could have asked them to use their stewardship rights and responsibilities and engage with directors and senior management about the Commission’s recommendations: which they support, which they oppose and why. He adds: "Of particular interest is whether boards accept accountability for overseeing the lobbying activities of their companies but also their trade associations."
And he proposes investors to take safety into account in a more strategic way than has happened to date and highlights that one indicator of this happening is how research suppliers evolve to cover these “new” risks.
Separately the FT also report that "BP investors shrug off US oil spill verdict" and in response to this worrying trend to simply flip back to "business as usual" so quickly, he warns that "While some sought to frame this as a freak accident, even an Act of God, the uncomfortable reality is that it was a predictable surprise. And most worrying for investors, is that the Commission says the same could happen or worse as the industry goes after frontier oil including in the Arctic." He ends with the hard reality that "Institutional investors can only be confident that corrective action will happen if they also put into action their learnings from a catastrophe that saw 50 per cent wiped off the share price of a stock that is in almost everyone’s portfolio."
Raj Thamotheram is senior adviser, responsible investment, at Axa IM.