THE HIP METHODOLOGY

THE HIP METHODOLOGY

HIP™ = Human Impact + Profit. Today’s accounting systems only examine financial results (revenues, costs, taxes) and liabilities that are financially measurable. But a company creates many more impacts – on physical and mental health of customers and employees; the wealth of employees and suppliers; the air, water and ecosystems we live in; the participation across genders and income classes; and the overall trust earned by its actions. The HIP methodology quantifies the results of each of these impacts – and then highlights how they drive financial results – higher sales or margins, lower lifecycle costs, and credits or incentives from tax policies. A truly HIP company would both benefit society and be extremely attractive to investors – in terms financial (higher profit, lower risk) and human (balanced, sustainable).

There are three categories to analyze: HIP management practices, Human Impact, and Profit. Typically, great practices drive increasing performance on impact; the correlation to profit depends on company strategy, competitive behavior and industry structure.

HIP Management Practices: Five equally-weighted elements compose this category, which are rated on a five-point scale (5 is highest; 1 is lowest). By adding the scores together, the highest possible Practices score is 25. In April 2006’s HIP Scorecard, both United Technologies and Herman Miller scored 24 of 25. In our latest analysis, Shell and Chevron scored 15 of 25.

Vision: Top-rated companies commit publicly to sustainable products with a net-positive impact that also drive profitable growth. AMD, a designer and producer of computing products, motivates its engineers and global staff by targeting to serve half the world’s population (3-plus billion citizens) with internet accessibility by 2015. Though some Big Oil companies relate their vision to their values, there are no clear deadlines for true energy sustainability.

Performance Measures: Comprehensive measurement of the highest-impact outcomes and results that are tracked alongside business measures is top-notch performance. United Technologies, an industrial conglomerate including Otis Elevators, comprehensively tracks and manages social, environmental and financial results in monthly scorecards. Though Big Oil companies have disclosed their carbon footprints, these measures are not integrated with financial performance yet.

Financial Alignment: The top companies understand seek out sustainability that naturally drives profit, through earth-friendly products that also drive new markets and higher levels of profit margin. General Electric, which makes and sells water-treatment facilities and wind turbines, had more than $10 billion of its revenues in 2006 certified “green” – and expects at least $50 billion certified by 2010. For nearly all the top 10 Big Oil firms, less than one percent of capital expenditures is focused on renewable energy, delaying the day when profit is driven by solar, wind or geothermal sources.

Accountability: Top firms have close attention by the Board, CEO and executives, and align goals, rewards and recognition to succeeding in sustainability. GE has greenhouse-gas targets for all business units – and withholds bonuses or promotions if not achieved. No Big Oil company we interviewed comes close to this standard.

Decision-Making: Leading companies involve all their employees – from product development to manufacturing to service. Interface Inc. has saved more than $400 million over 10 years by empowering its 4000 staff to contribute ideas, initiate projects and share in the rewards. A few Big Oil companies applied a sustainable framework to large capital projects, or energy efficiency improvements of existing facilities, but still lack the overall full-employee engagement.

Human Impact: Five equally-weighted components comprise this category, where the highest possible Impact score is 100 (and the lowest is 0). The energy utility PGE scored a 73 in April 2006’s cross-industry scorecard. BP scored a 54 in our analysis of 2006 results for Big Oil.

Health: The state of physical health and mental stress of the employees and suppliers – and where possible, the impact of a company’s products on its customers’ health. For Big Oil, we examined the rates of death and accidents for employees and contractors (which can be three times the size of the staff worldwide), employee satisfaction (as an indicator of mental stress) and the access to affordable health care by both staff and contractors. The best scores are for the lowest rates of injury or death, and highest rates of satisfaction and access to care. ENI of Italy scored highest at 14 of 20.

Wealth: The contribution to building income and appreciating assets for employees, suppliers and customers. For Big Oil, we analyzed the compensation for engineers and retail service-station staff, the access to and matching rates of retirement savings programs, and the relative prices at the pump for customers. The best scores are for highest compensation, access and matching, and lowest average prices charged at the pump. BP led this category with 18 of 20.

Earth: The distance to carbon-neutrality, and overall reusability or recyclability of products. For Big Oil, we rated the relative rates of carbon emissions and greenhouse gases per equivalent barrel of oil produced (including natural gas). In addition, we weighted the rates of nitrous oxide, sulfur dioxide, and volatile organic compounds per barrel, and the barrels of oil spilled relative to all oil produced. Renewable energy investment relative to overall capital expenditures was also rated as a measure of both current performance and future commitment to sustainable products. Top scores are lowest rates of emissions (compared to worst performers) and higher rates of renewable energy investment. The top performer in this category was Marathon with a score of 8.5 of 20.

Equality: The proportional representation of gender, ethnicity and income class to the societies in which they operate. For Big Oil, we analyzed the share of women and ethnicities on the Board, managers and executives, and overall staff. In addition, we rated CEO total compensation relative to overall staff, adjusting for the increase in shareholder value while leading the firm. BP led this category with 10.5 of 20.

Trust: The clear disclosure of how the company operates, which builds credibility among stakeholders and shareholders. For Big Oil, we analyzed each company’s geographic footprint of where they sourced oil. We then calculated a “trust” score based on ratings from Transparency International (a global nonprofit seeking to eliminate corrupt government practices). Money spent lobbying governments was not included due to lack of complete information for all firms. Higher scores went to the more transparent communicators and the minimum share of countries with low-rated transparency. Marathon scored a 12 of 20.

Profit: This category examines the return to shareholders, including both appreciation in price as well as reinvested dividends and stock splits. For Big Oil, we analyzed from month-end November 2002 to November 2007, and annualized the numbers for easy-to-understand comparison with other investments. Profit can be examined on a one-year basis using either total shareholder return or return on average equity.

      Total Shareholder Return
      1-year 5-year Return on
      Dec/Dec Nov/Nov Avg Equity
Ticker TopTenBigOil HQ locale 2005/06 2002/07 2006
BP BritPetrol London UK 8.0% 17.2% 25.7%
CVX Chevron Calif USA 33.7% 25.3% 26.0%
COP ConocoPhilips Texas USA 26.5% 30.4% 22.3%
E ENI Roma ITA 30.7% 27.1% 26.4%
XOM ExxonMobil Texas USA 39.1% 23.3% 35.1%
MRO Marathon Texas USA 54.7% 44.7% 37.7%
REP Repsol YPF Madrid ESP 20.3% 19.2% 17.7%
RDS.A Shell Amst. NED 19.3% 18.9% 25.2%
TOT Total Paris FRA 21.2% 18.9%24.5% 15.7%
VLO Valero Texas USA -0.3% 53.8% 32.5%