It's easy to wax nostalgic about your past, but if you're BP these days, you're probably sentimental about the salad days of March 2010. At the beginning of the year, BP was still in its last gasp as a "green" oil company, one that vowed to go "beyond petroleum." Because it was one of the biggest players in alternative energy, and had a good record on climate change and corporate governance, it had continued to grace several SRI portfolios. Certain funds at Trillium Asset Management, Pax World, MMA Praxis and Legg Mason still held it at the beginning of April. So did the Nasdaq OMX CRD Global Sustainability 50 Index and the Dow Jones Sustainability Indexes.

Yet BP had already started to show warning signs. At the end of 2009, the company had logged more than 700 OSHA safety complaints for its refinery in Texas City, Texas, which exploded in 2005, killing 15 workers and injuring 170 others. Pax World brought the company under review for these and for violations in Ohio and says it was already in the process of dumping BP early this year. Trillium also looked askance.

But these firms didn't drop BP until its Deepwater Horizon rig exploded in the Gulf of Mexico in April, killing 11 workers and, according to government estimates, spilling 13 times more oil than the Exxon-Valdez-some 4.1 million barrels. Many firms wanted to keep some sort of oil exposure, and there weren't a lot of replacements, even though the safety record was making companies wary.

"I would have loved to be able to say we got out in January," says Trillium CEO and senior portfolio manager Matthew Patsky. "But we didn't, and we were out sort of after the pile on of issues and overwhelming evidence of there being troubles."

The Deepwater Horizon disaster has thrown a spotlight on environmental, social and governance data. The safety issues in BP's closet had been enough to give investors fair warning about possible problems (even if not everybody acted on it). And though the numbers can't predict disaster, they can show investors both the risks-and opportunities-of investing green.

Investors' increasing consciousness of the environmentally sensitive business has them scrambling for more robust environmental data, and information providers are rushing to the space. Bloomberg added ESG data to its terminals in November of last year. Also in November, Thomson Reuters bought Zug, Switzerland-based Asset 4, a provider of pollution, water use and corporate governance data for some 3,000 companies. In March of this year, MSCI announced its acquisition of RiskMetrics for $1.55 billion (the latter had announced its purchase of ESG data company KLD in November).

"It's absolutely true that ESG data is becoming more important for fundamental analysis," says Henrik Steffensen, the vice president of marketing and business development services for Asset 4 in Switzerland. "This is also a growth area that Thomson Reuters sees for the company."
As part of its effort to push transparency, Bloomberg's terminals now allow stock analysts to look at a host of extensive environmental data and ratios. Alongside a company's EBITDA and P/E ratios, Bloomberg can also calculate greenhouse gas emission intensity as a ratio of sales. Or carbon dioxide equivalent intensity as a function of EBITDA. Or water usage per employee.

"On Bloomberg you can look at the data and some of the ratios we put together and compare that to standard financial analysis, which looks at price earnings and price to book or any other familiar financial ratio that's quantitative," says Emil Efthimides, the manager of the Environmental Social and Governance Data Project at Bloomberg. "You can commingle any of our ESG with traditional financial data. No extra charge for users."

Bloomberg uses 114 different data points and 62 different ratios on 4,082 companies (as of mid-August). Right now, says Efthimides, Bloomberg's environmental data users come overwhelmingly from those in the SRI space, who represent only 10% of assets under management, he says. But the company believes that the data will build a bridge to non-SRI investors because those companies that practice their business in unsustainable ways ("pushing costs externally," in the parlance of SRI portfolio managers) are going to be run poorly. They will face greater fines. They will face higher costs. They will spend more for electricity. They will undoubtedly have to trade their carbon usage in many countries. They are likely not running their supply chains very well.

In other words, bad environmental management will be bad business management. Just as dividends have become a beacon for some analysts of whether a company can sustain its earnings, SRI analysts can take a measure such as, say, water usage, and call it a harbinger of a company's ability to keep doing business.

"The normal business model is to expand into the developing world to keep your profit margin up.  You can't do that if there's no water to operate," says Cary Krosinsky, a vice president at Trucost, which for ten years has offered environmental consulting and data services.

"Whether it's from KLD, Jantzi-Sustainalytics, Thomson or Bloomberg, you're looking for specific and more gritty data than you were expecting or getting ten years ago," says Timothy Smith, the director of the environmental, social and governance group at Walden Asset Management in Boston. "So I think this is a genie that is not going back into the bottle. If anything, the new challenge will be going to smaller companies and asking them to start disclosing. You know the old line, 'What's measured is managed.'"

The Data
The data itself, though, is extremely variegated and extensive, and the way analysts use it differs in much the same way financial analysts parse 10-K language, sorting through P/E ratios or free cash flow according to their tastes, and then making human judgments (and in the case of BP, maybe even unfortunate ones).

Trucost starts with financial information from sources such as Dun & Bradstreet to examine a company's operations, then looks at direct environmental impacts and those from the company's supply chain. After using up environmental data from public sources, the firm uses information such as fuel use or purchases to stand in for emissions and then tries to verify or tweak its findings after interviewing the companies.

One of the studies done by the firm looks at greenhouse gas emitted by companies in the S&P 500 index. According to the report, if each company in the most carbon-intensive industries, (utilities, oil and gas, food and beverage, chemicals and basic resources), had to pay $24.28 per metric ton of carbon dioxide it used under a cap-and-trade system proposed for the U.S., the EBITDA of these companies could fall anywhere from 1% to 117%, says Trucost in a recent report, "Carbon Risks & Opportunities in the S&P 500" (a study based on February 2009 data on 497 index participants). The 34 utility companies in the index could see their combined earnings halved.

"If a market price of $28.24 were applied to each ton of [carbon dioxide equivalent] emitted by companies in the S&P 500 and their first-tier suppliers, carbon costs would total over $92.8 billion," says Trucost. "This equates to over 1% of revenue from the companies in 2007 and over 5.5% of combined EBITDA."

"If you look at carbon intensity, one has to look at a company's direct impacts as well as indirect impacts," says Krosinsky. "There is Scope 1, Scope 2 and Scope 3 environmental impacts. Scope 1 would be the direct operations of a company-manufacturing, in effect. Scope 2 would be their purchase of electricity, and Scope 3 would be everything else-all the indirect impacts like commuting. But often it's supply chain: What are companies purchasing in order to create their products or to conduct their normal business?"

Many companies outside the utilities, oil and beverage sectors are at risk from "Scope 2" emissions. The insurance, banks, media, telecommunications and technology sectors have the lowest carbon intensity. More than 203 companies in the index would see carbon costs amounting to less than 1% of EBITDA.

What's likely more interesting for data junkies is that the range of all emissions is wide within each S&P 500 sector. Among utility companies in the S&P study, the carbon intensity ranged from 245 metric tons of carbon dioxide equivalent per million dollars (emitted by electric and gas distributor PG&E Corp.) to 15,145 metric tons (for Allegheny Energy). In oil and gas, Nabors Industries, a well drilling and rig servicing contractor, boasts the lowest carbon intensity, at 98% smaller than the largest intensity company in that arena (Dynegy, whose carbon costs could represent 31% of its revenue, according to the report). Within the food and beverage, travel and leisure, and construction sectors, there is also wide variation, with some companies two-thirds more intensive, says the report.

These variations can be meaningful because in many cases socially responsible investors want to be exposed to diverse sectors. "If you had a desire to maintain exposure to the traditional energy sector, it was hard to find appropriate replacements and I think that's why you saw the players sort of dragging their feet on changing [BP] earlier than they did," says Patsky. "The Gulf disaster was sort of a final straw. You saw a lot of us jump and jump early. But we didn't get out as early as I would have loved to."

"You can be either out of the sector entirely because they all have issues or you can try to use the best-in-class analysis and try to invest in the companies within that sector that have better ESG policies and practices," says Joe Keefe, the president and CEO of Pax World Management. "And Pax World funds, like many funds in the SRI sector ... had more often than not tended to [rate BP higher] because of environmental and other ESG issues. I think [it was] the largest investor in alternative energy in the world."

In other words, despite the push to bring hard quantitative ESG data to the forefront, many managers say that robust metrics are going to be only part of the picture-single tiles in a vast mosaic that inevitably includes human error and value judgments.

"Quantitative data is often thought of as the finish line, but I think of it as the starting line," says Steven Lydenberg, the chief investment officer of Domini Social Investments, one of the companies that stayed out of BP.

"For example, in the oil and gas industry, in the mining industry, in the chemical industry and in the construction industries, fatalities-safety-is a key performance indicator," he says. "You can certainly compare companies across industries by the number of fatalities; that's one of the most simple, straightforward, easy numbers to use. Then you can go to the safety record, which is in terms of work hours lost, injuries per work hours, days lost per work due to injuries."

On the environmental side, the company looks at ozone depleting chemicals and volatile organic compounds (used in paint and coatings). "We look for dramatic reductions in VOCs that I would look for at a single company over time-so reductions over a three-to-five year period." For companies like Microsoft where safety isn't as much of an issue, he says he would look for employee benefits like flex time and telecommuting.

But even if the data is becoming more robust, that's not necessarily because more companies are offering it up. In fact, much of the information comes from intensive digging, OSHA databases and watchdog groups. That is changing, though, as both regulators demand more data and companies start to offer it voluntarily. As of January 1, the Environmental Protection Agency required large emitters of greenhouse gases to record and collect data on their emissions. Also in January, the SEC released guidelines for companies to disclose to investors how climate-change regulations will affect their business both directly and indirectly. The Global Reporting Initiative, an organization that develops guidelines for companies to report sustainability data, said that 80% of Fortune 250 companies now report corporate responsibility data, twice as many as in 2005.

However, says Julie Gorte, the senior vice president for sustainable development at Pax World: "It's not like people are tying it up in a nice bow in the 10-K."

To help analysts make judgments, data providers advertise different ways of slicing and dicing data. Asset 4 claims that its model is more dynamic because it can repurpose info from Thomson Reuters' international news apparatus. Bloomberg offers its users quick access through its ubiquitous machines. And Trucost, one of the companies behind Newsweek's green list, boasts that it doesn't stop with public data but instead relies on its environmental impact methodology.

"Bloomberg has a partial database because they rely on what companies disclose publicly," says Krosinsky.

"The whole trend out there is toward getting companies to report," says Krosinsky. "But what are they reporting, and are they actually useful pieces of information that the company provides? If the report ticks all the boxes and yet they still have incidents like in the Gulf of Mexico, I'm not so sure that reporting is the be all and end all."