The Deepwater Horizon disaster continues to unfold, more than two weeks after the accident, and the outlook is increasingly gloomy for the Gulf of Mexico's economy, ecosystem and of course BP. Initial estimates of oil gushing from 5,000 feet below surface were 1,000 barrels per day. Revised estimates put that number in the 2,500 - 5,000 barrels per day range, though no one can be certain of the true magnitude.  If the rate of leakage can't be slowed soon, The Exxon Valdez accident of 1989, which spilled 260,000 barrels into Alaska waters, will become an increasingly realistic comparison.

Though there are many facets to this evolving story, the take away for green investors is clear and fundamental: Adding environmental criteria to the investment process does not only help investors pursue growth opportunities in new markets, but it also helps mitigate risk. To the extent that one equates green investing with clean tech, it is good to note that green investing is not one-dimensional and can also incorporate strategies that look at minimizing downside capture. This is accomplished by tilting a portfolio's exposure away from companies with above-average environmental risk and towards companies with below-average environmental risk, regardless of industry.

So that begs the question: Was it obvious that BP had above-average risk among energy companies? Of course, hindsight is 20/20. However, one could have concluded that BP's focus on being a leader at the industry's boundaries such as deep sea exploration and the Arctic would expose it to significant environmental risk in addition to a high marginal cost of oil.

The Deepwater Horizon rig didn't have a remotely controlled shut-off switch, and some people view that as negligent. Generally, negligence is not a one-off, but an attitude embedded in corporate culture.  There are other examples of negligence in BP's recent past. For instance, in October 2009, the Occupational Safety and Health Administration fined BP $87 million for still not having fixed safety issues at the Texas City refinery, the site of an explosion in 2005 that killed 15, injured more than 170, and defined the legacy of former CEO John Browne. Lastly, BP's current CEO Tony Hayward, in his all-out pursuit of the frontiers of exploration, moved away from the firm's Beyond Petroleum push.  In my view, major energy companies have the scale to be successful in pursuing "Beyond Petroleum." It will diversify their revenue stream and reduce their environmental risk per dollar of revenue. I believe BP made a strategic error in giving up its leadership position in the renewable energy space.

It should be noted that if you took a closer look at some of the other majors, you would find similar risks.  As such, a green investor should perhaps favor smaller, more regional energy companies, without the skeletons in the closet, with greater emphasis on renewables, and less exposure to controversial areas such as deepwater exploration, the Arctic Refugee, Canadian tar sands, etc.

So can one quantify environmental risk? Unfortunately this is not an exact science, though it is much more straightforward after the fact. On May 4, BP warned that the cost of tackling the oil spill is now exceeding $6 million per day and will keep rising as the company intensifies its mitigation efforts. If you consider that BP's 2009 net income was the equivalent of $45.5 million per day, $6 million per day equates to 13% of daily profit. This is not insignificant, especially if you consider that it is unknown when this will end, what the asset impairment will be, or the extent of the legal damages.  Not to mention the fact that resumed drilling at the Tiber field is far from certain.

BP's stock is down about 15% from where it was before the spill. It seems to have stabilized momentarily, as markets await further information. Exxon, Shell et al, have only given up a few percentage points over the same time period. A green investment idea might be to sell out of some of the other majors and buy an energy company with a lighter environmental footprint. One would retain the upside of higher energy prices, without the downside of an environmental blow up or legislative risk to exploration efforts. At least, that is the opinion of this green investor.

Jan P. Schalkwijk, CFA, portfolio manager, has 13 years of experience in the investment industry and is the founder and chief investment manager of JPS Global Investments. From 1997 to 2005, Jan worked at Franklin Templeton Investments, where he was vice president of investment platforms.