“The Petroleum Industry: hidden risks and value potential for financiers and investors” is Innovest’s latest industry sector report, highlighting the environmentally-driven risks and opportunities found in the 13 oil companies of the S&P 500. The survey found Royal Dutch/Shell at the top of the pile, in terms of environmental performance, with BP Amoco placing a close second.

“Shell and BP have superior environmental management programs, particularly the level of engagement in sustainable development and triple bottom line issues,” said Dr. Martin Whittaker, Senior Analyst at Innovest. “They were also considered to be particularly strong with respect to renewable energy development programs, corporate social responsibility, and climate change.”

Innovest used its proprietary EcoValue 21 environmental rating methodology to assess the relative environmental performance, or “eco-efficiency,” of the 13 companies. The rating is based on more than 60 different aspects of environmental risk, opportunity, and management, including positions on climate change, renewable energy, fuel cells, natural gas, emissions, and social management in international operations.

While Shell and BP Amoco’s top rating may come as no surprise to investors, Innovest also gave high marks to Exxon, considered one of the most entrenched oil companies for its patent denial of the evidence supporting global warming. According to the report, Exxon has been motivated by the Valdez oil spill, ten years ago, to develop a respectable environmental management framework to reduce environmental impacts and improve performance.

At the other extreme, Unocal, Occidental, and Canada’s Imperial Oil received low ranks for their above average industry risk exposure and a below average management capacity to control risk. Unocal’s performance could improve in the future, according to the report, due to its relatively high reliance on natural gas production and its good position to capitalize on environmentally-driven business opportunities.

Innovest recognizes that environmental performance is a double-edged sword, combining the challenges of environmental risk with the opportunities of environmental innovation and competitive advantage. In the case of the oil industry, that means understanding and responding to the changing dynamics of the global energy business, including alternative fuels and renewable energy sources.

Texaco, for example, has expertise in waste gasification that they are marketing to others. Only BP Amoco and Shell, the leaders in Innovest’s survey, have made serious commitments to renewable energy sources. Shell plans to capture 10 percent of the estimated $1 billion solar market by 2005, investing over $500 million over a 5-year period to achieve this.

In every sector rated by Innovest so far, companies receiving above average ratings outperformed below average companies by 3 to 18 percent, as measured by total stock market return, suggesting the power of their model to project stock market performance. The oil industry is no exception, with above average companies outperforming companies with below average ratings by more than 17 percent over the past year.

Oil companies have particularly wide variations in environmental risk exposure and environmental management capability, according to the report, with profound economic implications not captured by conventional analytical models. The future stock market performance of leaders and laggards will likely diverge further, as environmental regulations and public concerns about the environment continue to increase.

Concerned investors will find Innovest’s report a valuable indicator of future performance in the oil industry based on environmental criteria. “There are a whole bunch of issues relating to business risk, management quality, and strategic opportunity that are largely unrecognized by traditional investment analytical tools but that can and do exert influence on a company’s profitability and future stock market performance,” said Whittaker.