Two years ago on 20 April  2010 the Deepwater Horizon oil rig in the Gulf of Mexico exploded, caught fire and then sank, killing 11 workers and seriously injuring several others.

In the weeks and months that followed the world watched whilst an environmental and economic disaster unfolded as oil from the damaged wellhead gushed into the Gulf. Finally, after an estimated 4.9 million barrels of oil leaked into the sea, the wellhead was capped on 15 July  2010 and a relief well completed on 19 September 2010.

At the time it seemed as if the explosion and subsequent leak would threaten the existence of BP, the company that owns the Macondo well. As it turns out BP has survived, although its liabilities in relation to the incident have run into tens of billions of dollars and its share price still hasn’t recovered, as investors will be aware.

Given the scale and impact of these events it was widely considered that some sort of Rubicon had been crossed for oil exploration, with the future of the industry placing a far greater emphasis upon sustainability and a safety-first approach to extracting oil.

However, a far different picture emerges if we look at some of the major incidents that have occurred over the last year.

In December 2011 a 40,000 barrel spill took place after a tanker accident at the Royal Dutch Shell operated Bonga oil facility, the worst spill in Nigeria in recent years. There are a number of lawsuits that have been filed against the company as a result of the spill.

In June 2011 a 3,000 barrel spill occurred in Bohai Bay, China, from a facility jointly operated by ConocoPhilips and China National Offshore Oil Corporation (CNOOC). ConocoPhilips was fined USD 158m by the Chinese government as a result of the spill.

Chevron has been fined USD 110 million by the Brazilian government for its part in a 3,000 barrel spill in the Frade field in November 2011, about 120 km off the coast of Rio de Janeiro state. This spill is also the subject of a USD 11 billion civil lawsuit.

So why are the oil companies still prepared to take such big risks both financially and in terms of their reputation? Because of the price of oil. The price for a barrel of Brent crude on 20^th April 2012 was around USD 120 and it hasn’t been under USD 100 for the last twelve months, despite there being a global recession.

It seems that at this price level oil companies are prepared to engage in riskier ways of getting at oil because the rewards are so significant. This increased appetite for risk by many oil companies can be seen in the expansion of technically challenging and expensive exploration and extraction activities such as ultra deep water extraction, gas fracking, tar sands, the development of fracking type techniques to get at shale oil deposits and the expansion of exploration activities into the Arctic.

All three of the companies listed above have significant stakes in tarsands projects, Chevron and Shell have both invested heavily in ultra deepwater exploration and Shell is involved in oil exploration in the Arctic. Given the significant oil spill incidents these companies have experienced recently it is vitally important for investors to understand how these companies are managing the risk of these methods of extraction.

For investors this means that they are likely to get good returns from investment in the sector but they are also being exposed to increased levels of risk due to the potentially severe environmental and social impacts of these riskier methods of extracting oil.

Responsible investors will want to ask these companies exactly what it is that they are doing to mitigate the risk of these methods and, where there is room for improvement, they will need to actively engage with the company in order to get commitment to address the issue effectively.

The Deepwater Horizon disaster is a warning of what can happen if this risk isn’t dealt with in the right way.

On the one hand it could be argued that minimising tax is in shareholders’ financial interests; on the other hand, tax avoidance could pose reputational, compliance and cash flow uncertainty risks for companies.

Christian Aid would like to encourage companies to voluntarily implement taxation principles and to be transparent about their taxation activities. The reason? Christian Aid’s tax agenda is primarily about enabling developing countries to collect fair amounts of tax which are then given back to support communities’ essential services and development.

Christian Aid is working to put an end to poverty and their recent paper Tax and Sustainability: A Framework for Businesses and Socially Responsible Investors highlights how tax is a sustainable source of revenue and an effective way of promoting accountability between a state and its citizens. But Christian Aid also believes there is a business case. The factors which businesses care about when making investment decisions include an educated population, strong infrastructure, a stable policy and environment. Effective rates of taxation may be seen to be subsidiary to these concerns, but without adequate tax revenue these are less likely to be in place. Aggressive tax avoidance can present significant risks to companies, says the charity. These include reputational risks, risks with regard to relationships with host governments, and cashflow risks; when projected tax bills are based on aggressive avoidance schemes, then loopholes are closed, firms can be left with hefty tax bills.

So why do investors interested in responsible or ethical investment not already look at tax? The roundtable suggested a few reasons:

• The complexity of ‘tax’ makes it difficult to explain  investor engagement asks to companies. Investors need clearer information to guide them, and companies they invest in, towards best practice.
• In comparison to climate change, which is now  considered as a risk / opportunity area by many responsible investors, it  is perhaps harder to demonstrate how poor corporate behaviour on tax  grounds could have widespread effects upon long-term shareholder  profits.  However, it was noted at the roundtable that the ‘universal  investor’ argument may assist here; global investors may be affected by attempting to externalise the consequences of inadequate tax payments.
• Currently, there is limited analysis available on  corporate tax behaviour. However this is linked to demand. Greater  awareness about taxation as an issue might in some cases lead asset owners to include tax requirements in their investment mandates. This in turn would drive the need for asset managers to require research to assist them in understanding company exposure to tax risks.
• Corporate tax behaviour may not yet be perceived to be financially ‘material’ to investors. However, increased debate and greater  awareness of tax issues may lead to regulatory change in some countries.

What’s out there to help investors concerned about corporate performance on tax? Christian Aid‘s paper on tax and responsible investment includes a framework looking at policy, management and reporting. It also gives examples of responsible (and abusive) corporate behaviour on tax.  There is a plan to further develop this framework and to provide a casebook of examples for use by companies, investors and regulators, showcasing companies whose behaviour has been successfully changed.

In an age of austerity and with a number of tax avoidance cases recently reported in the press, general awareness and concern about corporate performance on taxation is increasing. As an issue that potentially touches upon both social (e.g. community development) and governance (eg. corruption) concerns, it may gain greater prominence on investment agendas in the future.

While inclusion of all types is important to effective leadership, International Women’s Day (8^th March) offers an excellent opportunity to reemphasise the importance of greater gender diversity on corporate boards across the world.

There is little evidence of significant progress in closing the gender gap at board level. EIRIS data shows that 46 per cent of UK companies listed on the FTSE All Share Index have no women on the board, whereas 15 per cent of North American companies in the FTSE All World Developed Index have no women on the board, and in the Asia Pacific region the figure is 73 per cent.

This lack of representation of women on corporate boards should be of particular concern to shareholders as research suggests that there is some evidence of a link between women on the board and financial performance.

A forthcoming study conducted by academics from the Centre for Responsible Banking & Finance of the University of St Andrews and the Principles for Responsible Investment Academic Network sets out to explore this. The study focuses on over 1,500 companies, from 26 developed countries, over a 90 month period. Financial performance data is combined with EIRIS’ data which categorises companies according to the percentage of women on their boards.

Globally, a value weighted portfolio of those companies with more than 33% women on boards of directors is found to generate significant positive excess financial returns. In the US, those companies with more than 33% of women on the board are found to outperform market and investment style benchmarks. However, in Greece and Italy, the situation looks less promising for business women, as those companies with no women on the board perform well.  Whilst there are other factors which may account for positive and negative returns, the study’s findings tend to support initiatives that bring women on corporate boards in developed countries.

Carrots or sticks?

Investors and policymakers are trying various strategies for increasing gender diversity on boards. These strategies generally fall into two categories: carrots and sticks. Carrots have been used as a strategy in various parts of the world. In the US, shareholders have filed resolutions requesting that companies adopt policies committing them to consider gender diversity in board candidate searches. Many large US companies have adopted such policies and now report on how diversity was considered in director searches.

In the UK, a government-backed report published by Lord Davies of Abersoch in 2011, set a voluntary target for a minimum of 25 per cent female board representation in FTSE-100 companies by 2015, but stopped short of compulsory measures. Since the launch of the Davies report, progress on improving the gender balance on UK boards has been limited. According to the 30 per cent club – a group of Chairpersons voluntarily committed to bringing more women onto UK boards – only 15 per cent of FTSE-100 board directorships are now held by women. Whilst the ratio of female appointments has doubled over the last few years, it is still only 27 per cent.

In other countries, policymakers have taken a different approach to increasing board diversity through the use of quotas for the number or percentage of women on corporate boards. In 2003, Norway adopted a law requiring boards to meet a certain level of board diversity by 2008 or risk penalty. The results are compelling – in 2002 women held approximately 6% of board seats at public companies in Norway, in 2011, women held 40.1% of board seats. Other countries following suit include Spain, France, the Netherlands, Iceland, Italy and Belgium.

A review of board diversity in various countries seems to support the effectiveness of the ‘stick’ method – countries that have used sticks tend to have higher board diversity. However others argue that quotas can undermine the principle of equality, are patronising to women, and can result in situations whereby women are appointed as mere figures-heads who take on multiple boardrooms to fill quotas. Instead they argue for a more business-led approach whereby directors are appointed on merit and business leaders take affirmative action in moving voluntarily towards a better gender diversity.

Regulation and guidance on diversity is becoming clearer. The US financial regulator introduced rules in 2009 requiring public companies to define and disclose their diversity policy, while in the UK the Financial Reporting Council and the revised UK Corporate Governance Code did the same in 2011.

What does this mean for investors?

While a carrots and sticks method for increasing gender diversity on boards might an expeditious way to address the issue, it may not be realistic in all markets. Investors are ideally placed to challenge the composition and diversity of boards. Through direct engagement, shareholders can put pressure on companies to take affirmative action in moving toward a better gender balance at all levels in their organisations. Stock exchanges also have a role to play in encouraging, or demanding, that companies increased diversity at board level.