Andrew Friedman, President
Christopher Chiou, Chief Investment Officer
Ryan Arnez Monroe, Sustainability Investment Professional
AJF Financial Services, Inc.
18 August 2015
When a public company is involved in a public safety issue, very often the stock price of that company and its shareholders/reputation pay a steep price. Let’s face it, accidents happen. Corporate negligence, however, is a different story. Corporate executives and manager’s poor decisions are often the cause for additional and unnecessary public and employee safety risks. There is also a correlation between employee accidents, public safety issues and employee satisfaction, or dissatisfaction . Analysis of the safety track record of corporations can provide compelling insight into the importance good environmental, social and/or corporate governance plays within their decision making process; consistent ESG adherence is a valuable metric in evaluating which stocks may or may not be worthwhile long term investments and may be a barometer of things to come.
Have you heard the one about air traffic controllers making mistakes due to lack of adequate sleep? How about the Wal-Mart truck driver speeding along with little sleep trying to make up mileage, like the one that hit comedian Tracy Morgan’s car? Or chemical companies like Ciba that have outsourced disposal of waste for years only to later discover that waste was being dumped in unsealed landfills in your neighborhood? We wish there was a punch line here but unfortunately, the punch line is the public loss of confidence in corporate responsibility.
Henry Luce once said “Business, more than any other occupation, is a continual dealing with the future; it is a continual calculation, an instinctive exercise in foresight.”
This research piece is comprised of two analyses, both highlighting the correlation between safety and sustainability: The first analysis dives into the importance of transparency around safety issues within three unrelated companies. The second analysis profiles two Houston based mid-stream operators within the petroleum industry; Both companies are of similar financial profile, the extent of their safety profiles paints the picture of two drastically different companies.
On the surface BP appeared to transform itself into a greener more responsible company for the five years prior to the Deepwater Horizon disaster in 2010. There were commercials and announcements about all of the clean, alternative energy initiatives BP had started, in reality a different story was hidden from the public. Review of BP’s troubling safety patterns and environmental concerns the previous decade makes their proclaimed transformation dubious at best! Before the Deepwater Horizon disaster of 2010, there was the Prudhoe Bay Oil Spill in 2006. Before the Prudhoe Bay Oil Spill of 2006 there was the Texas City Refinery explosion of 2005.
•The Texas City Refinery explosion, which resulted in fifteen workers losing their lives and injuring more than one hundred fifty was the deadliest U.S refinery disaster in a decade.
•In the five years preceding the Deepwater Horizon disaster BP admitted to breaking US environmental laws, committing outright fraud & paying record fines to avoid prosecution.
•OSHA statistics show BP ran up 760 safety violations, while most other similarly positioned oil production/exploration firms racked up single digit violations.
•Domini Social Investments placed BP on a watch list in 2009 over safety concerns and never included them in their social responsible investment strategies.
“Our avoidance of these three companies [BP and two others] demonstrates that social and environmental standards can make a difference in investment decisions. Such standards can provide early warning signals of major disasters to come.” (Domini Social Investments)
Trinity Industries Inc. (TRN) is a Dallas, Texas based conglomerate that owns a variety of businesses which provide product and services to the industrial, energy, transportation and construction sectors; if you drive on our nation’s highways you probably passed by a guardrail of their design. A whistleblower complaint filed/ uncovered by a competitor revealed Trinity neglected to disclose a material design change in 2005 (rebranded as ET-Plus) that affected the integrity of guardrails approved for federal highway reimbursement at the state level. Trinity Industries made these changes solely as a cost-cutting maneuver resulting in unsafe products being deployed on highways across the United States.
Trinity Industries is appealing the ruling on the basis they believe the ruling was erroneous and no fraud happened. We are of the belief that actions trump words; multiple states removing ET-Plus system due to safety integrity concerns should cause concerns and inform your decisions accordingly.
The majority of our analysis focused on companies whose reputations are indicative of potential disasters to come, Apple Inc. is the exception in this analysis. Apple Inc. (APPL) devotes considerable resources and leads the effort in providing transparency as it pertains to their relationship with suppliers. Apple’s supplier responsibility website provides a wealth of information that is easy to navigate and easy to understand. Apple makes available a document known as the Suppliers Responsibility Standards, which breaks down their standards on Labor & Human Rights, Health & Safety, Environment and Ethics. Since 2007, Apple has issues an annual supplier responsibility progress report, with each subsequent edition becoming more robust/comprehensive than the previous.
“Safety should never be subject to compromise. So were engaging with suppliers early and working onsite to make sure facilities and production processes are up to code. And to help build a more skilled, proactive management team, we’re enrolling more midlevel managers into our EHS (Environmental Health & Safety) Academy.”
Some highlights from Apple’s 2015 Supplier Responsibly Report:
· Enrolled 156 more suppliers and 392 more participants in the EHS Academy.
· Launched more than 870 EHS Academy Projects in 2014.
· Graduated the first class of EHS Academy participants.
To provide scope of the scale of impact that Apple’s EHS Academy has consider the following facts:
· Apple’s EHS Academy in 2014 covered 216 supplier sites and covering 900,000 workers around the globe.
· In 2014 seventy-three newly educated EHS managers were working in throughout Apple’s supply chain, 392 more participants enrolled, 156 more suppliers were added and 870 additional environmental, health and safety projects were launched to improve the working conditions in suppliers facilities.
· For the first time in 2014, Apple Inc. publicly released their Regulated Substances Specification list; this comprehensive list informs suppliers of the chemicals they are prohibited and limited from using in the manufacturing process.
Houston, Texas based Plains All American (PAA) and Spectra Energy Partners (SEP) are pipeline companies that facilitates the mid-stream operations (transportation/storage) of petroleum products; Spectra Energy Partners focuses primarily on natural gas products while Plains All American focuses on natural gas and liquefied petroleum gas products. Both companies are of similar financial profile; The difference in EPS (earnings per share) between both companies are less than 1%, The differential in their respective dividend yields are about 1.5% and their market caps are separated by $800MM. What makes these two companies of interest has little to do with what their implicit similarities and everything to do with what their explicit differences.
Reviewing Plains All American website, it’s conceivable to assume they are just a midstream operations company that facilitates the transportation/storage of petroleum products without ruffling to many feathers along the way. A simple Google search of Plains All American tells a much different story! Plains All American makes very little mention of two recent oil spills within a two month time frame (May 2015 and July 2015) that released a combined 6,600 barrels of crude oil into the environment. The first spill in May released 2,400 bares of crude oil into the coastal waters near Refugio State Beach in Santa Barbara County, CA creating a nine mile oil slick along the coast line. The second spill in July released 4,200 barrels of crude oil outside of St. Louis, Missouri. The six thousand barrels of crude oil spilled is enough to fill the tanks of twelve thousand small automobiles. Were these two oil spills isolated incidents or do the speak to an culture lax safety standards?
Spectra Energy Partners’ safety track record is much different than Plains All American; every query we’ve done relating to Spectra Energy Partners illustrates a company with positive earnings without the recent headline garnering safety lapses that stained Plains All American’s reputation.
A couple interesting facts to note about Plains All American and Spectra Energy Partners:
In further review of Plains All American and Spectra Energy Partners website, we can draw parallels between Employee Engagement, Safety and how these play into corporate strategy. Spectra Energy Partners devotes a great deal of resources to expounding the relation of one to the other, while Plains All American doesn’t.
Spectra Energy Partners formally solicits employee feedback on a biannual basis through the ES² survey; The ES² is an Employee Safety & Engagement Survey given to Spectra Energy Partners employees and administered by outside consultancy Tower Watson.
Spectra Energy Partners’ page on safety from their website speaks about employee satisfaction and the safety of its employees as being integral to its overall corporate strategy. Links to Spectra Energy Partners’ employee page can be found at the end of our research. Observing how highly Spectra Energy Partners views its employees, we felt it important to research how Spectra Energy Partners employees views its employer. Analysis of www.glassdoor.com ( a site that allows current/former employees of an organization to submit reviews anonymously on various topics without employer influence) shows the CEO of Spectra Energy Partners earning the approval of more than ninety percent of its employees. Ninety-five percent of Spectra Energy Partners employees would feel comfortable referring friends as potential employees.
We reviewed Plains All American’s statistics, seventy-two percent of employees would feel comfortable referring their friends as potential employees. While less that Spectra Energy Partners, seventy-two percents seems high for a company with such high number of safety/maintenance infractions: we surmise a good number of employees (who posted Glassdoor reviews) endorses Plains All American’s practices as acceptable nor give too much care to the alarming statistics regarding their safety issues.
In our view logical questions to ask are 1) How much does the issue of safety relate to lack of employees engagement from the employer and 2) Are employees generally unhappy because safety is an ongoing issue with their employer?
Employee engagement and safety segue into the discussion of sustainability. A pattern of lapses in safety speaks to a corporate value set that accepts them as normal part of business. The safety issues at Plains All American in due time will affect every stakeholder at all levels. Fines, settlements and/or clean up costs associated with preventable accidents ultimately reduce the amount of capital available to return to shareholders; reputational harm resulting from publicized safety lapses erodes trust in corporate strategy which in turn erodes shareholder value. If Plains All American isn’t talking about their safety record why should we expect them to speak about sustainability?
Wrapping up our analysis, we want to highlight a quote from Spectra Energy Partner’s page that’s pitch perfect in its summation of how their strategy differs from many of their competitors (including Plains All American):
“Our approach to sustainability is anchored in our corporate values and is integral to our decision-making and business performance. Our sustainability strategy is anchored by our business strategy and supports our company goals to be responsive to customer needs; reduce risk, attract, motivate and retain talent; deliver projects on time and on budget; and bring tangible value, such as jobs to the communities we serve. Through our commitment to sustainability , we can meet, and in many cases exceed, our stakeholders’ expectations and become the ‘Company of Choice’ .”
The well documented safety infractions in tandem with recent lapses highlighted throughout our research differentiates companies with business practices that aren’t sustainable at current (PAA, TRN, BP) in stark contrast to companies with business practices that are sustainable at current (APPL, SEP) whom maintain safety records to match. Apple Inc. clearly knows the power/influence of its sheer scale and effectively uses it to make their supplier better stewards of ESG governance. When a company exerts this level of compliance down the supply chain, this can only be viewed as a net positive for all stakeholders concerned. Spectra Energy Partners consciously and consistently nurtures a value set where safety/accountability/employee engagement are ensconced at every level their safety records and financial performance should continue to reflect it accordingly. Sustainable business practices can make a business and brand better and more profitable.
It is our belief a vitally important component of safety/sustainability is a vibrant, harmonious and engaged workforce that eschews the values of its employer without hesitation. If the core of sustainability is accountability and a company has a well documented history of lax safety standards it is well within reason to question their overall environmental, social stewardship and commitment to good social governance.
A company’s stakeholders are comprised of employees, customers, communities, and their supply chain(s). Companies that place a high priority on the health and safety of their stakeholder base can be rewarded with happier and more productive employees, reputations that command greater respect amongst the public, and decreased risk of liability to operations. It’s an often overlooked piece to the due diligence puzzle but accounting for it can reveal valuable insights well beyond the numbers.
Furr, Laura ” Plains All American Pipeline Spills 4,200 Barrels of Oil”. Houston Business Journal,
13 July 2015. Web. 5 August 2015
Thomas, Pierre “BPs Dismal Safety Record”. ABC News,
27 May 2010. 5 August 2015
“Commitment to Safety and the Environment.” Plains All American. Plains All American, n.d.
“Safety.” Spectra Energy Partners. Spectra Energy Partners, n.d.
5 August 2015 < http://www.spectraenergy.com/Safety/ .>
“Safety Last? BP, Toyota and Massey Energy.” Domini Social Investments. Domini Funds, n.d.
“Sustainability.” Spectra Energy Partners. Spectra Energy Partners, n.d.
5 August 2015 < http://www.spectraenergy.com/Sustainability/Social/Our-Employees/ >, < http://www.spectraenergy.com/Sustainability/Our-Approach/ >, <http://www.spectraenergy.com/content/documents/Sustainability/2014_Sustainability_Report.pd f .>, < http://www.spectraenergy.com/Sustainability/Our-Approach/Sustainability-at-Spectra- Energy />
“Supplier Responsibility” Apple. Apple Inc, n.d
10 August 2015 < http://www.apple.com/supplier-responsibility/health-and-safety />, < http://www.apple.com/supplier-responsibility/ >, < http://images.apple.com/supplier-responsibility/pdf/Apple_Progress_Report_2015.pdf >
Laise, Eleanor “Oops: ‘Socially Responsible’ Funds hold big stakes of BP”. Wall Street Journal,
17 July 2010. 11 August 2015
Lee, Patrick ” Driver-Spearing Guardwails Becomes Crusade for Whistleblower”. Bloomberg News,
12 June 2014. 18 August 2015 < http://www.livawards.org/pdf/2014/lee.pdf >
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