The state of New York on Wednesday stepped up its pursuit of ExxonMobil Corp., claiming in a lawsuit that the Texas-based supermajor misled investors regarding the risk that climate change regulations posed to its operations.
ExxonMobil called the allegations baseless and a product of “political opportunism.” The lawsuit also came the same day that ExxonMobil issued its 16th annual sustainability report, which outlines, among other things, how the corporation is managing the risks of climate change, as well as its environmental performance.
New York Attorney General Barbara D. Underwood claimed in the lawsuit that the Irving, TX-based supermajor for years assured investors that it was accounting for the likelihood of increasingly stringent regulation of greenhouse gas emissions “by rigorously and consistently applying an escalating cost of those emissions to its business planning, investment decisions, calculations of the amount and value of company reserves and resources, impairment assessments, and projections of future demand for oil and gas.”
However, the producer “did not abide by these representations, and instead did much less than it claimed, deceiving investors as to the company’s true financial exposure to increasing regulations and policies adopted to mitigate the adverse effects of climate change.”
ExxonMobil has been fighting a multi-state lawsuit brought in 2015 and led by New York that is seeking decades of internal documents and communications related to climate change. Last year a Harvard University peer-reviewed analysis also concluded that ExxonMobil had misled the public regarding climate change communications over a 40-year period.
What makes the case so potentially powerful is New York's Martin Act, passed in 1921, which gives the state’s attorney general extraordinary powers and discretion to investigate financial fraud, exceeding those given any regulator in any other U.S. state.
Other states and jurisdictions have filed lawsuits against Big Oil companies, including ExxonMobil, but those complaints do not carry the heft of New York’s authority.
According to Underwood, ExxonMobil has marketed itself as a “secure long-term investment and courted long-term investors such as institutional shareholders, life insurance companies, and pension funds.” In the past decade, institutional shareholders “repeatedly have sought more information and disclosure regarding risks faced” related to climate change regulations.
“Investors put their money and their trust in Exxon, which assured them of the long-term value of their shares, as the company claimed to be factoring the risk of increasing climate change regulation into its business decisions,” Underwood said. “Yet as our investigation found, Exxon often did no such thing.
“Instead, Exxon built a facade to deceive investors into believing that the company was managing the risks of climate change regulation to its business when, in fact, it was intentionally and systematically underestimating or ignoring them, contrary to its public representations.”
The complaint alleges that the corporation informed investors that it accounted for the risk of governmental regulation of climate change by applying a “proxy cost” of carbon to serve as a stand-in for the likely effects of expected future events. In this case, the proxy cost relates to the effects of climate change regulations that ExxonMobil has publicly stated, which it expects governments throughout the world to impose and steadily increase over the coming decades.
“As the complaint alleges, Exxon told its investors that it used that proxy cost in its investment decisions, corporate planning, estimations of company oil and gas reserves, evaluations of whether its long-term assets remain viable, and estimations of future demand for oil and gas.”
The lawsuit said contrary to those representations, ExxonMobil “frequently did not apply the proxy costs as represented in its business activities.” In many cases, the company instead “applied much lower proxy costs or no proxy cost at all.”
The fraud allegedly “reached the highest levels of the company,” including by former CEO Rex W. Tillerson, who retired to become President Trump’s first Secretary of State. Tillerson “knew for years that the company was deviating from its public representations by using a second set of proxy costs from undisclosed internal guidance that were lower than the publicly disclosed proxy costs,” the lawsuit alleges.
Management “also knew that using these lower figures made Exxon more susceptible to climate change regulatory risk, but did not align these two sets of proxy costs for years.” The fraud apparently continued even after ExxonMobil increased its internal proxy cost guidance to conform to public representations.
When the company’s management realized that applying the publicly represented proxy costs would result in “massive” costs and “large write-downs,” as well as shorter asset lives, it decided to apply an “alternate methodology” that was not disclosed, the lawsuit said.
Under “alternate methodology,” ExxonMobil “chose not to apply any proxy cost and, instead, allegedly chose to assume that existing climate regulations would remain in place and unchanged, indefinitely into the future.”
By applying a lower proxy cost or not applying any cost at all, the company “repeatedly and consistently underestimated the potential financial risk that increasing climate change regulation posed to its assets and value,” the lawsuit said.
Underwood offered examples of the alleged fraud, some related to oilsands projects in Canada.
The lawsuit, filed in the New York Supreme Court, seeks to prohibit ExxonMobil from “continuing to misrepresent its practices in this area, and requiring it to correct its past misrepresentations; in other words, to tell investors the truth.”
The complaint also is asking the court to award damages by disgorging all monies obtained in connection with the alleged fraud, and restitution. Additionally, the court was asked to direct a comprehensive review of the company’s failure to apply a proxy cost consistent with its representations, and the economic and financial consequences of that failure.
The president of the U.S. Chamber of Commerce’s Institute of Legal Reform (ILR), Lisa A. Rickard, called climate change “a serious issue that should be dealt with in the public policy arena.” New York’s lawsuit “is nothing more than a contortion of the securities litigation system. In bringing this case, the state is yet again using the Martin Act as a political weapon. Litigation will not help us confront the challenge of climate change.”