July 16, 2010

Safety Last?: BP, Toyota, and Massey Energy

Domini avoided investments in BP, Toyota, and Massey Energy: three major companies that have recently experienced devastating public scandals and catastrophes.

That Domini avoided these three companies demonstrates that social and environmental standards can make a difference in investment decisions. Such standards can provide early warning signals for major disasters to come.

A look at these companies underlines the importance of evaluating the safety record of publicly traded corporations before making the decision to invest, particularly for energy and transportation companies.

BP

Despite BP's commitment to alternative energy and its public statements on the need to address global warming, we have consistently rejected BP for the Domini Funds based on a pattern of safety and environmental concerns, including a 2005 explosion at BP's Texas City refinery that killed 15 employees and an oil spill and persistent corrosion issues at the company's Prudhoe Bay pipeline operations. Several years ago, we informed a BP representative that they would have to substantially improve their safety record to be approved for our funds. We have also consistently excluded the two other companies involved in the Deepwater Horizon disaster, Transocean and Halliburton, for a variety of social and environmental reasons.

Toyota Motor

The extensive safety and quality problems that forced Toyota Motors to make its massive worldwide recalls in 2009 severely damaged the reputation of a company that had in the past been praised for its quality, employee, and environmental initiatives. However, our research identified a number of negative factors that counterbalanced the positive press that the firm had been receiving. One of our concerns was the company's consistent record of major vehicle recalls in Japan (over 1.887 million in 2004, over 1.88 million in 2005, and about 1.3 million in 2006), as well as a pattern of labor relations problems in the Philippines (anti-union activity) and Japan (abusive "cosmetic subcontracting").

Domini was also among the first in the SRI world to uncover Toyota's involvement in Burma through a partially owned auto components subsidiary. (See our second-quarter 2008 Social Impact Update for the full story). We continue to engage with the company, urging it to end this relationship. Finally, in our view, Toyota's sales of energy-efficient hybrids are largely offset by sales of light trucks and SUVs, giving it only an average overall record on fuel efficiency for its fleets.

This pattern of controversies and relatively weak positives led us to consistently exclude the firm from our portfolios.

Massey Energy

The decision not to hold Massey Energy was relatively straightforward, since Domini rarely approves companies that have substantial involvement in coal mining. Coal emits one of the highest percentages of greenhouse gases per unit of energy produced among the fossil fuels. In addition, as an industry, coal mining firms have a long historical pattern of safety challenges. Although we don't automatically eliminate all coal companies, we must see an exceptional record of positive social and environmental initiatives in order for such firms to qualify for inclusion, a circumstance Domini rarely encounters. Massey Energy was no exception to this general rule.

Key Performance Indicators

Integral to our research and standards setting process is the use of "key performance indicators" For each industry, we identify approximately a half dozen key business-alignment and stakeholder-relations factors that take precedence in our decision making. These indicators  focus our analysts on the key sustainability challenges each company faces. For example, safety is a key indicator for us for both the automotive industry and for energy companies. If a major oil and gas company has a poor safety record, that factor may well override other positive aspects of its social and environmental performance. Learn more about how Domini applies its standards.

Our investment process by no means guarantees that we will avoid all companies with controversies. Many companies that we approve have mixed records where we feel strengths counterbalance concerns. Unanticipated problems and controversies can occur in others. We do believe, however, that it is important to signal our concern about safety and environmental issues to major corporations both by refusing to invest in some and engaging with others, in the hopes that concerted ongoing efforts by concerned investors like ourselves and our peers will over time bring about positive change.