Growing Pressure to Tighten ESG Pension Rules Following Gulf Disaster

(June 12, 2010) — Following the ongoing, devastating impacts of the Gulf of Mexico oil spill, the UK government is under mounting pressure to tighten regulations that require pension funds to disclose what environmental, social and governmental (ESG) issues are taken into account in their investment policy.

A trio of MPs — Zac Goldsmith, Martin Horwood and Caroline Lucas — are campaigning for the coalition government to set up protection regulation against environmental and social risk, IPE.com reported. FairPensions, a London-based lobbying organization that has previously tackled BP and other oil companies on issues like the Tar Sands project, recently launched an online campaign to urge pension scheme members to call on the UK pensions minister, Steve Webb, to guard scheme members from ESG risks.

FairPensions has asserted the Gulf of Mexico oil spill by BP, the third largest oil company in the world, after ExxonMobil and Royal Dutch Shell, is the latest in a growing list of “avoidable” ESG crisis to threaten pension funds. The group has warned that greater scrutiny of company risk-management strategies by pension funds could help manage investment risks.

According to the lobby group, research and experience suggests that UK pension schemes’ scrutiny of their investee companies’ exposure to environmental, social and governance risks remains inadequate. BP is a stark example of this tendency, but the problem is a wider one, the firm stated on its Web site.

“Pension funds need to take environmental risks much more seriously in their practices and not just their policies – and the regulatory framework needs to be updated accordingly,” said Lucas to IPE.

Joanne Segars, chief executive of the National Association of Pension Funds (NAPF), estimated that UK pension funds’ exposure to BP is about 1.5% of total assets, which are in excess of £800 billion. Institutional investors, therefore, face mounting concerns that the oil leak will attack BP’s prospects for longer-term growth and future dividends.

In recent news, BP’s Chairman Carl-Henric Svanberg and Group Chief Executive Tony Hayward issued a statement  saying the firm will meet obligations to institutional investors, including pension schemes, but are unable to guarantee dividend payments, which accounted, approximately, for a generous 13% of the dividends dolled out by British companies last year, according to FairPensions. BP currently accounts for £1 in every £8 of dividend payments to UK pension funds.

BP’s next dividend payment will be announced on July 27. Any slash to the firm’s dividends would be the first made by the company in 18 years.