British Petroleum Case Study: Analyzing ESG Factors and NPV Impact

This case study examines the Environmental, Social, and Governance (ESG) factors relevant to British Petroleum (BP) and their impact on the company's financial performance, particularly focusing on the bottom line and Net Present Value (NPV) valuation of projects. It identifies key ESG factors such as BP's commitment to reimagining energy, transitioning to an integrated energy corporation, focusing on hydrocarbons, implementing a sustainability framework, supporting communities, and diversifying its portfolio. The study discusses how these factors influence NPV by tapping into new opportunities, reducing operating costs, and affecting the cost of equity. It also references CFA Institute research to validate the importance of ESG considerations, highlighting the financial consequences of neglecting ESG, such as the Deepwater Horizon oil spill, and emphasizing the increasing recognition of ESG as a driver for superior risk-adjusted returns. The analysis concludes that BP's ESG initiatives contribute to sustainability, enhance its corporate identity, and support effective financial management, thereby increasing the value of the business.

Financial-Management
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Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Q 1 identification of relevant ESG factors that would affect the bottom line of the BP:...........3
Q 2 Use the factors identified and describe how they would affect the NPV valuation:............5
Q 3 Use of CFA Institute research published to confirm that above factors discussed:.............5
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8
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INTRODUCTION
Financial management is necessary step in any organisation 's financial
resources management. A financial professional is responsible for financial planning, arranging,
guiding, and overseeing the funds of an organisation. Financial management within an entity is
the process of achieving corporate targets and aims through financial managers (Chouaibi,
Chouaibi and Rossi, 2021). To control resources, it's indeed essential to understand financial
management roles of financial managers. The study covers identification of ESG Factors in
context of British Petroleum along with impacts of these factors on projects NPVs. Further, the
study discusses about how ESG factors affects NPV valuation of company. The study also
covers use of research to support such ESG factors recognised matter.
MAIN BODY
Q 1 identification of relevant ESG factors that would affect the bottom line of the BP:
ESG Factors: these implies to Environmental, Social as well as Governance factors. Such non-
financial variables are increasingly being used by stakeholders in their review phase to recognize
significant risks and development prospects Corporations like BP are increasingly providing
reports in their yearly report or in standalone sustainability report, although ESG indicators are
not generally part of compulsory financial reporting (Friede, Busch and Bassen, 2015). In this
regard following key ESG factors of British Petroleum, as follows:
Reimagine energy:
BP's objective is to the reimagine energy for humans and planet with the goal of becoming net
zero corporation by year 2050 or earlier, and assisting world in doing so. The organization
outlined ten targets which support achievement of this target, which take into account
both upstream (productions) and downstream (sales) elements of company's value chain, and
also complete and intensity measures. This factor will increase productivity and effectiveness of
company’s operations that ultimately lead to improvement in NPV of related projects.
Being Integrated Energy Corporation:
The company is transforming from a multinational oil corporation to integrated energy
corporation by year 2030, the company plans to be very unique, slashing oils and gas production
around 40%, rising low-carbon investment nearly tenfold, and nearly doubling consumer
touchpoints in the convenience as well as mobility market to twenty million per day. To monitor
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progress towards BP becoming ne.t zero, the organization issued interim goals for 2025 to 2030.
Through making an image of integrated-energy corporation, organisation will be able to improve
their cost of capital of projects and thereby NPV
Focusing hydrocarbons: In Oman, North Sea and Egypt with new oils and gas production.
Company is on target to produce 900,000 additional barrels each day by end of 2021, compared
to year 2015. Such new barrels are cash generator fuelling company turnaround, with margins
that are on average 35% greater than company's base portfolio. The corporation's dedication to
secure and dependable operations is unwavering. This fact will help company to increase their
productivity which will give strengthen to company’s projects’ NPV (ESG datasheet, 2019).
Sustainability frame:
Company's new sustainability framework regulates company's overall approach towards
environmental as well as social concerns focusing on three aspects: net zero, improving people's
lives and caring for our world. Our obligations to communities where we reside and operate, as
well as to anyone who serves everyone, have been explained by the corporation's revised human
rights policies. In company's current ventures, company want to have net positive effect on
biodiversity, according to the corporation 's new biodiversity stance. Accredited as UK's Living
Wage Employer- first for major energy and conveniences retailer, leading in pay increase for
about three-quarters of UK's retailing business. Rendered one of corporation's largest-ever
charitable contributions to UK mental health-charity Mind, as well as developing new avenues to
assist company's workforce in managing their mental wellness which will assist its project’s
value and productivity.
Supporting communities: Providing assistance to policymakers and allies during this
remarkable year, including contributing $2 million to WHO's COVID-19 Solidarity Response
Funds, offering free fuels to ambulance and rescue vehicles throughout UK, and contributing
supercomputing capacity to aid curb spread of disease. The unique image of company has been
established in market which will indirectly help the company’s projects, even in terms of NPV.
Diversifying BP: The corporation signed an agreement to join fast-growing US offshore
winds market; company expect to start industrial-scale productions of green hydrogen at Lingen
refinery in the Germany; Company leading a collaboration to build UK's first decarbonized
manufacturing hub – the Net Zero Teesside; as well as company started producing 800MW
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of solar power by Lightsource BP. Such diversifications lead to innovation in company’s project
and boost their NPVs.
Q 2 Use the factors identified and describe how they would affect the NPV valuation:
Company BP will tap new opportunities and reach into established ones with a solid ESG
proposition. When governments have confidence in business players, they are much more eager
to grant them entry, permits, and licenses that open up new development opportunities ESG will
also help you save a lot of cash. Among other benefits, successfully incorporating ESG will
assist in the reduction of increasing running costs. This is pertinent to project cash flow effects
of sustainability as-well-as conduct sensitivity evaluation to consider both favourable and
unfavourable risks through ESG influences. Different regulatory mechanisms, concession
arrangements, and contracting systems can all have an effect over infrastructure assets around the
world (Velte, 2019).
ESG considerations that can't be expressed in cash-flows will be captured by changing
the cost-of-equity, also known as the hurdle rate. Concentrating on cost of equity allows for more
comprehensive global comparison across subsectors and identifies future changes in a
corporation's ESG profile. On valuation aspect, considering asset class's longer duration, it's
important to look at both longer-term patterns and how they affect cash flows and valuations.
Long-term forecasting (frequently 30 to 40 years) catches not only shorter-term but also longer-
term ESG patterns that affect the cash-flows of specific assets. On risk side, it's important to
acknowledge that some organizational leaders will be effective at handling ESG, and also that
ESG concerns will differ by asset, area, and industry (Duque-Grisales and Aguilera-Caracuel,
2019).
Q 3 Use of CFA Institute research published to confirm that above factors discussed:
CFA institute has recently published a research heading “Environmental, Social, And
Governance Issues in Investing”. This research covers multiple aspects of ESG factors of BP
specifically (Environmental, Social, And Governance Issues in Investing. 2019). In this regard
following is discussion to support the discussed ESG factors, as follows:
According to the research, Deepwater Horizon oils drilling rig exploded in Gulf of Mexico
during April 20, 2010, killed 11 employees and causing the world's worst oil leak from drilling
rig. Four million barrels oil eventually spilled into Gulf of Mexico, wreaking havoc on
air, leisure and water quality along coasts. Marine life, oceans, land and air ecosystems,
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industries, and port participants all suffered significant consequences. The total amount
of damage to environmental resource base was projected to be $8.8 billion. In 40 days after the
blast, BP (erstwhile recognized as the British Petroleum) destroyed 51percent of market value,
and was forced to pay $28 billion in responding and cleaning-up costs.
The environmental effect of Deepwater Horizon spill was focus of attention. Research
identified what triggered the environmental catastrophe in the first place—the below-peers
protection practices that fuelled the eruption (a societal characteristic) and oversight and
transparency shortcomings (a prominent governance issue). This raises the basic question of
what corporation should have learned.
Asset management that effectively incorporated ESG into investing practice outperformed
those who didn't, according to study. Furthermore, analysis has shown that there is return gap
between equity securities with reduced ESG-related risks and those with greater ESG-related
threats. In both scenarios, it was discovered that taking ESG into account resulted in return
premium.
Research also inquired regarding their inspiration for incorporating ESG. Superior risk-
adjusted yields, business/client-driven, including impact corporate practices and ethical standards
were among the research alternatives. Interestingly, approximately 60% of participants listed
superior risk-adjusted yields as a driving factor for integrating ESG into investing practice,
including business/client-driven coming in second. Non-monetary motives outweighed
monetary motivations for just a limited number of fund managers—lesser than 8%. ESG was
listed as financial driver by the vast majority of fund managers (Van Duuren, Plantinga and
Scholtens, 2016).
According to 2019 ESG sustainability report, the overwhelming majority of controlled
investments use both quantitative as well as qualitative evidence in ESG evaluations. According
to a preliminary estimation of asset management based on qualitative and quantitative ESG
results, roughly 90% of effectively engaged asset managers regard ESG as investment factor.
The remainder 10% of fund managers don't conduct ESG reviews as part of their operation.
Finally, these figures suggest that ESG will help investors get a more complete picture of
investing prospects. Finally, the wealth management community is coming to the conclusion that
incorporating ESG considerations into investment practices adds benefit. Comprehending ESG
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characteristics would help recognize uncertainties that need to be handled or taken into account,
and we expect that yields will inevitably represent this fact.
CONCLUSION
From the study this has been ascertained that BP’s ESG factors are indicating
sustainability in performance of company and also company will be able to make an unique
identity in industry. Financial management assists entity in making financial scheduling and
management decisions using enterprise resources. An effective leader is good planner, organiser,
manager as well as supervisor of funding flowing in and going out. Financial manager's prime
aim is to increase value of business.
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REFERENCES
Books and Journals:
Chouaibi, S., Chouaibi, J. and Rossi, M., 2021. ESG and corporate financial performance: the
mediating role of green innovation: UK common law versus Germany civil
law. EuroMed Journal of Business.
Friede, G., Busch, T. and Bassen, A., 2015. ESG and financial performance: aggregated evidence
from more than 2000 empirical studies. Journal of Sustainable Finance &
Investment, 5(4), pp.210-233.
Velte, P., 2019. Does CEO power moderate the link between ESG performance and financial
performance? A focus on the German two-tier system. Management Research Review.
Duque-Grisales, E. and Aguilera-Caracuel, J., 2019. Environmental, social and governance
(ESG) scores and financial performance of Multilatinas: Moderating effects of
geographic international diversification and financial slack. Journal of Business Ethics,
pp.1-20.
Van Duuren, E., Plantinga, A. and Scholtens, B., 2016. ESG integration and the investment
management process: Fundamental investing reinvented. Journal of Business
Ethics, 138(3), pp.525-533.
Online:
ESG datasheet 2019. [Online]. Available through: <
https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/
sustainability/bp-esg-datasheet-2019>
Environmental, Social, And Governance Issues in Investing. 2019. [Online]. Available through:
<https://www.cfainstitute.org/-/media/documents/article/position-paper/esg-issues-in-
investing-a-guide-for-investment-professionals>
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