How has the January 2004 restatement by Shell (ticker: RD) reducing its proven oil reserves by 20 percent affected its standing as a corporate social responsibility (CSR) leader? The scandal, which involved executive foreknowledge of the mistaken statements, resulted in a significant downgrading of Shell to a three on a scale of ten on the “Traditional Governance Score” assigned by Innovest Strategic Value Advisors in its recent Integrated Oil and Gas Industry Report. Similarly, BP (BP) is the target of widespread stakeholder opposition to its lead role in the Baku-Tblisi-Ceyhan (BTC) pipeline. The pipeline could adversely affect Kurds according to human rights activists, and sturgeon stocks in the Caspian according to environmentalists.

However, Shell and BP remain two of the top overall CSR performers in Innovest’s recent integrated oil and gas industry report, along with Suncor (SU), illustrating how strong CSR performance encompasses a broad range of activities. CSR laggards identified by the report include Marathon (MRO) and several companies operating in emerging markets, such as PetroChina, Yukos, and Surgutneftegas. And, as is the case in the almost every other sector examined by Innovest, the CSR leaders financially outperformed the CSR laggards, supporting a business case for addressing social and environmental issues.

“The report clearly shows that over the longer term oil and gas companies with above average ratings outperform those with below average ratings,” said Hewson Baltzell, president of Innovest. “Between 1996 and 2004, the higher-rated companies outperformed lower-rated companies by 38.6 percentage points (3860 basis points).”

Shell earned a AAA EcoValue21 rating, which assesses 60 environmental aspects, and a AA Intangible Value Assessment (IVA) rating, which assesses 80 social aspects (both ratings mimic bond ratings, ranging from AAA to CCC). BP and Suncor both earned AA EV21 and AAA IVA ratings. Marathon earned a B on the EV21 rating and a BB on the IVA rating, while Surgutneftegas received a CCC on the EV21 rating and a B on the IVA rating; Yukos earned a CCC on both ratings.

Innovest groups companies earning BBB and above into a leaders portfolio and compares that portfolio’s financial performance on a monthly basis to a laggards portfolio filled with companies earning below BBB. While the leaders portfolio outperformed the laggards portfolio throughout the study period, the financial performance differential between the two portfolios varies over time. For example, the CSR laggards portfolio caught up to within 1.6 percentage points in August 2003.

“During that month, we had added coverage of a number of emerging markets companies, notably Surgutneftegas and Yukos, each of which we give below BBB ratings and each of which performed very well that month (especially Yukos, with a 26.6 percent total return),” the report notes.

By the same token, Shell financially underperformed the integrated oil and gas sector from January 2001 through November 2003, according to a chart in its EV21 rating. In other words, Innovest is not positing a one-to-one correspondence between CSR performance and short-term financial performance at individual companies. Rather, it is tracking long-term correlations between the CSR performance and financial performance across industry sectors.

The report highlights the major challenges confronting the industry, which include escalating climate change risk, corporate governance scandals, and the shift towards new, lower impact products.

“Leading companies are taking proactive measures to address these issues,” said Juan Silva, Innovest’s oil and gas senior analyst. “For example, some are reducing their exposure to climate change risk by investing in renewable energy projects and by developing natural gas and cogeneration.”

“They’re also recognizing carbon costs in their business strategies and new project development,” he continued.

CSR leaders such as Shell, BP, and Suncor are all addressing climate change in significant ways. However, laggards such as Marathon and Lukoil are not.

“Marathon Oil and Lukoil have neither reported their position on climate change nor their corporate strategy to minimize exposure to related regulations,” the report states.

Marathon and Lukoil both earn zeros on Innovest’s “Climate Change Risk Abatement Strategies Score,” a subcategory similar to the “Traditional Governance Score.”