Shell, Exxon get high environmental ratings

Royal Dutch/Shell and Exxon Corp. have emerged as the top two environmental performers in a study of selected oil and gas companies' "eco-efficiency." The study was performed by Innovest Strategic Value Advisors Inc., Toronto.

"Shell's $500 million investment in renewables and Exxon's leading role with GM, Toyota, and Renault in the development of low-emissions gasolines were notable 'plus points,'" said Innovest.

Innovest is an investment advisory firm that specializes in environmentally oriented finance and investment opportunities. For this report, the firm analyzed more than 60 performance parameters for each of 13 large-capitalization U.S. oil and gas companies, plus Royal Dutch/Shell.

With regard to Shell's inclusion, Innovest Senior Analyst Martin Whittaker said, "Our analysis was carried out for the entire global company, but emissions data and Superfund information (for Shell) are U.S.-based, as they are for all the companies. We have normalized this to account for company size, so that the data is revenue-neutral."

The U.S. focus of this report explains why BP Amoco plc is absent from the list of companies. When asked how BP Amoco might rank, Whittaker said, "Based on what we have seen so far, we would consider BP Amoco-ARCO to be a top-tier company, evidenced by its commitment to renewables, (its) emissions trading (initiative), and (its) high-level corporate commitment.

"Research on BP Amoco-ARCO, together with other European majors, will be available shortly. We may be integrating U.S. and Europe soon thereafter to determine a more global ranking of companies."

Results

Innovest evaluates companies' performance in areas related to environmental risks, opportunities, and management tactics. From this, it derives an environmental rating ranging from AAA to CCC (similar to credit-rating agencies' evaluations). Innovest calls its ratings "EcoValue 21 scores," after its proprietary eco-efficiency rating tool.

Environmental rankings for the 13 companies analyzed are shown in the chart.

Shell's superior rating reflects below-average industry risk exposure, above-average capacity to control risk, and a "leading-edge" capability to capitalize on environmentally driven business opportunities, says Innovest.

"Another leader is Exxon, which was motivated by the significant adverse effects of the Valdez incident to develop a highly rated environmental framework to reduce environmental impacts and improve performance." Exxon's vocal opposition to greenhouse gas emissions reductions, in favor of voluntary action and investment in new technology, detracts from its rating, however, says Innovest.

Companies at the other end of the scale have generally poorer performance records, higher levels of risk, and a weaker capacity to manage risk.

Companies can change their rankings by altering their focus. "Unocal's performance could improve in the futureellipsedue to its relatively high reliance on natural gas production vs. oil and a good potential to capitalize on environmentally driven business opportunities," said Innovest.

A number of trends are reshaping the petroleum industry, all of which cause companies to place more emphasis on cost reduction and consolidation.

"With the American Petroleum Institute, the World Energy Council, and other influential organizations repeatedly citing environmental matters as being among the most pressing of all issues faced by the oil and gas sector, it is clear that tomorrow's winners and losers will be increasingly defined by environmentally driven risks and opportunities."

Key environmental issues, as seen by Innovest, are shown in the table, along with the firm's recommended areas of focus for companies desiring to improve their environmental performance.

Prediction tool

Innovest's EcoValue 21 scores are intended to project future stock market performance, says the company.

"Among petroleum companies, wide variations exist in environmental risk exposure and management capability to manage risk and capitalize on environmentally driven business opportunities. These differences have strong implications for stock price performance yet are not captured by conventional analytic methods. (This is) evidenced by the frequently large diversity in Innovest ratings among companies with similar debt and equity ratings."

Innovest is confident in the ability of its ratings system to predict market performance: "In every sector rated by Innovest, companies receiving above-average EcoValue 21 ratings outperformed below-average companies by 300-1,800 basis points (3-18%), as measured by total stock market return. Investor returns can be substantially improved by investing in companies with superior eco-efficiency," said Innovest.

"Going forward, the stock market performance differential between top and bottom environmental performers will likely expand as environmental regulations, public concerns about the environment, and market demands for more environmentally responsible products and corporate policies continue to increase.

"Environmental issues and costs demand a significant percentage of management attention and financial resources. Perhaps the most challenging long-term issue facing management is global climate change and the resulting implications for the economic and environmental sustainability of the industry itself.

"While many companies believe this is not a significant short-term issue, some companies believe it is and are implementing a strategy to address it."