€1.1bn hit to Norwegian pension fund reveals potential scale of UK pension funds losses on BP

In the wake of the Deepwater Horizon oil spill in the Gulf of Mexico, the Norwegian Government Pension Fund Global has announced a loss of €1.1bn on its 1.75% stake in oil giant BP, prompting further fears for the impact on UK pension funds.

Typically, UK pension funds have 1.5% of their assets (or 6% of their equity investments) in BP, making BP an enormously important stock. UK pension funds have already been financially hit by the decision to suspend dividend payments until at least the end of 2010, with BP responsible for £1 in every £8 of dividends paid by UK companies. The Norwegian Government Pension Fund Global's announcement - in which BP emerged as their single worst-performing investment - hints at the scale of losses for pension funds in the UK.

Investors must use their position as shareholders to engage further with companies to ensure that risks are identified and properly managed, helping to anticipate and potentially avoid future crises. We are recommending that the government tighten the existing regulations governing pension schemes to require that they disclose what environmental, social and corporate governance (ESG) issues are taken into account in their investment policy, how that policy is implemented, and how funds exercise their shareholder rights.

The Deepwater disaster is a stark illustration of the potential consequences of a neglect of ESG risks, which FairPensions' research has found to be pervasive in the investment and pensions industry. The research shows that pension funds typically delegate responsibility for environmental and social risks to fund management companies, many of which in turn identify low client demand and short-termism as barriers to the effective management of such risks. This worrying level of complacency - with many pension funds doing little to protect their members' money from ESG risks, despite accepting that such risks can be material - indicates an underlying trend which presents a risk of worse financial and economic shocks in the future.

Duncan Exley, Director of Campaigns at FairPensions, said,

"UK pension funds have had the potential financial consequences of corporate environmental and social issues - from socially irresponsible lending to poor environmental protection - demonstrated to them. The BP Gulf oil spill is a stark example, yet despite warning signs, UK pension funds' scrutiny of companies' exposure to such risk remains inadequate. Pension fund members are paying a heavy price for this neglect. Investors must now take action to ensure that future risks, such as those presented by climate change, are properly managed."