The explosion of BP’s Deepwater Horizon oil rig provides a striking example of how considering ESG factors can help investors reduce their exposure to risks. In 2010, the Deepwater Horizon oil rig exploded, killing 11 crewmen and causing the largest oil spill ever recorded in U.S. waters. This was a human tragedy and environmental catastrophe, but it was also a major problem for shareholders as BP’s share price plummeted by 55% following the explosion.
How could an investor foresee something like this? In the three years leading up to the explosion, regulators had cited BP for a staggering 760 “willful, egregious” safety violations. To put that into perspective, the next highest numbers were 8 (Sunoco and Conoco-Phillips), 2 (Citgo) and 1 (Exxon), In other words, BP was responsible for 97% of these severe violations.
So, the warning signs were there. But in order to see the warning signs, you had to look at the company’s health and safety record rather than just the financial statements. In other words, you needed to consider ESG factors to see that potential risk.