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Sensible Investing: Oil
infographic
Guide to Big Oil

Oil prices are soaring. Returns on energy stocks have been fat. The 30 largest oil companies account for some 6% of the entire global equities market. In building wealth to pay for your kids' college or your own retirement, ignoring energy stocks can be costly. If you're a mutual-fund investor, you probably already own a chunk of Big Oil, even if you don't realize it.

But if you care about the environment, or how companies treat their employees in developing countries where oil extraction is often a nasty business, you confront an inconvenient question: Can you calm your conscience without hobbling your portfolio?

Money in your pocket today can come at a high price tomorrow; eventually, climate change may affect all of us economically. On the other hand, few of us are giving up fossil fuels in our daily lives--we drive cars, fly planes, heat our homes. How can we best balance our obligations as global citizens with our personal needs and practices as investors?

Fast Company turned to the sustainability experts at HIP Investor Inc. and the Social Venture Technology Group, both based in San Francisco, for help. These firms have together developed an exclusive methodology they call HIP™--Human Impact + Profit--for measuring the environmental and social impacts of business. They rate companies based on their management practices (including setting sustainability goals, and if and how managers are held accountable for those goals), as well as their human impact (such as human rights, greenhouse-gas emissions, and investment in renewable-energy sources). HIP and SVT founders R. Paul Herman and Sara Olsen argue that, over the long term, companies' willingness to grapple with environmental and social issues translates into higher net income, through new products and lower costs, and stronger stock returns. The goal, they say, is to identify companies with practices that drive the creation of profit through positive social impact; as customers and investors migrate to these companies, delivering positive-impact products becomes a competitive advantage. The HIP analysis aims to predict which companies will increase profit and outperform peers (from their HIP-ness) going forward. If they're right, investing in progressive companies won't just help you feel better, it will be good for your portfolio.

We asked the HIP/SVT team to analyze the world's 10 largest integrated oil companies by revenue (excluding majority state-owned operations). What the team found was provocative. Several companies have hired sustainability chiefs, opened lines of communication with activists, and begun--slowly--to invest in renewable energy. Marathon Oil is blending ethanol with gasoline for a more environmentally friendly mix. Chevron is building its geothermal business. BP is funding solar power. Royal Dutch Shell is consulting with Chinese refineries on ways to reduce their carbon footprints.

Yet there is also plenty of window dressing that can obscure the overall impact of these businesses. Shell was recently forced to pull ads touting its green efforts by British regulators who found it had exaggerated. BP has paid massive fines for health and safety violations. Typically, Big Oil companies invest less than 1% of their capital budgets in alternative energy sources.