EXXON AND OIL SANDS ON TRIAL FOR MISLEADING INVESTORS ON CLIMATE RISKS
Exxon and Oil Sands Go on Trial in New York Climate Fraud Case
The New York attorney general says Exxon used two sets of books and misled investors by downplaying the potential costs of carbon emissions.
By Nicholas Kusnetz, Inside Climate News
NEW YORK, New York — In late 2013, ExxonMobil faced increasing pressure from investors to disclose more about the risks the company faced as governments began limiting greenhouse gas emissions. Of the many costs climate change will impose, oil companies face a particularly acute one: the demand for their product will have to shrink.
For years, Exxon had been using something called a proxy cost of carbon to estimate what stricter climate policies might mean for its bottom line. But as pressure from shareholders grew, a problem came sharply into focus: An internal presentation warned top executives that the way the company had been applying this proxy cost was potentially misleading. That's because Exxon didn't have one projected cost of carbon. It had two.
The contents of that presentation are at the heart of a trial set to start next week in a civil case brought against the company by the New York attorney general. Exxon is accused of disclosing one set of these projected carbon costs to investors while planners used an entirely different set internally for evaluating investments. The public set was more conservative and projected that climate policies would be more stringent, while the internal one assumed more modest attempts to limit emissions. The effect of using these dueling estimates, the attorney general says, was that Exxon hid tens of billions of dollars in potential costs, downplaying the risk to investors and inflating the company's value.
If the company is found guilty of defrauding stockholders, the penalties it faces could be substantial. Exxon's stock is among the most widely held in the country, nestled in pension funds, 401Ks and IRAs.
While Exxon has denied any wrongdoing, it does not dispute the core fact of the case: that for years it disclosed a public proxy cost that was higher than what it applied to its investment decisions. Its lawyers have argued these different sets of figures did not mislead investors and had distinct and legitimate purposes. But this only highlights another side of the case.
The energy Exxon produces today is more polluting, according to the attorney general's complaint, because the company took the potential costs of climate change less seriously than it represented to investors.
Applying a lower estimate for carbon costs made high-polluting projects look more financially attractive, and it undermined the investment case for any project that would reduce emissions. Nowhere is this clearer than in Exxon's tremendous investments in Canada's oil sands, a vast expanse of low-grade hydrocarbons that now make up about 30 percent of the company's oil reserves.
"The oil sands crystallizes, at least from my perspective, everything about this issue that is concerning with Exxon," said Andrew Logan, who runs the oil and gas program at Ceres, a nonprofit that works with investors to push for more sustainable business practices. "Oil sands tick all the boxes when it comes to a carbon-risky asset."
Exxon's big bet on Canada's tar sands
Because they require enormous amounts of energy to exploit, the oil sands are among the world's most expensive and carbon-polluting sources of oil. Exxon is one of the top producers there, and the company has continued to commit billions of dollars to the resource even as much of the rest of the global industry has fled the region, puzzling some investors who have tried to square this with Exxon's lip service to climate risk, Logan said.
"The oil sands are this very concrete, specific example — and very big example — of the kind of asset you wouldn't invest in," he said, "if you actually believed the rhetoric of Exxon and others about climate risk."
But the trial may prove to be about much more than Exxon's risky investments. Climate change has abruptly shifted in the public consciousness from a future threat to a present danger, and many people and even local and national governments have begun demanding that courts step in to assign liability for the enormous costs they are facing. In the United States alone, more than a dozen local and state governments have sued energy companies seeking damages. Exxon is a defendant in many of these cases.
"Any one of them presents a real risk," said Lisa Hamilton, an attorney who until recently led the climate and energy program at the Center for International Environmental Law. She said she expects to see more of these cases enter the courts, and that some companies are now reporting that the lawsuits could have a material impact on their financial health.
Of all the lawsuits seeking to hold industry accountable for climate damage, the New York attorney general's case against Exxon would be the first to go to trial. What happens in the New York courtroom will reverberate in the climate cases yet to come.