By Sophie Marjanac, Company and Financial lawyer, ClientEarth | 14 June 2017
As the New York Attorney General’s investigation unfolds, claims emerge that Exxon’s deception may be greater than was even previously contemplated.
Explosive revelations have emerged from the latest filing in the New York Attorney General’s (AG) investigation into Exxon Mobil Corporation’s reporting of climate risk.
In the filing, the AG claims the oil giant may have lied to investors about how it was protecting them from future losses, and may still be lying – a deception that appears to have been signed off by former CEO Rex Tillerson. The AG is fighting a motion by Exxon to quash its subpoenas requesting further documents and witness testimony. Millions of pages have already been supplied – but what has been provided has raised further questions about Exxon’s conduct.
The investigation is proving to be a cautionary tale about climate disclosure.
Exxon and the New York Attorney General – the story so far
The Office of the New York Attorney General (OAG) has been investigating Exxon for allegedly fraudulent reporting of climate risk to investors. It has been examining whether documents produced by the company substantiate the charge that the company knew far more about the impact of climate-related regulation on its business than it was prepared to reveal to investors and the Securities Exchange Commission (SEC) in financial filings and other required documents.
The OAG is investigating Exxon under New York’s Martin Act, state legislation that empowers the OAG to investigate corporate fraud.
In most jurisdictions, including the UK, it is illegal to fraudulently or recklessly withhold relevant information from shareholders, and in certain circumstances, shareholders have rights to recover losses they suffer as a result of relying on that misleading information.
Climate risk management – what exactly is the deception?
From 2007, Exxon told investors it had a policy of applying ‘proxy cost’ of carbon of up to an $80/tonne to all of its investment, asset valuation and impairment decisions. Based on this analysis, Exxon reported to shareholders in 2014 that it was confident that “none of our hydrocarbon reserves are now or will become ‘stranded’”.
But the OAG claims that this may not have been the case. In its filing, the OAG claimed the documents it has seen so far show that between 2010 and 2014 the company applied an internal proxy carbon cost far lower than it indicated to shareholders and that CEO Rex Tillerson was aware of and approved this inconsistency.
In fact, according to the brief, evidence documents show that for the company’s Albertan oil sands investments, the company applied the far lower carbon price payable under Alberta’s existing legislation and assumed these costs would remain flat into the future.
Exxon’s internal carbon cost – fixed, flexible or phantom?
But the most striking of the OAG’s claims is that no evidence has been found to demonstrate that Exxon consistently applied a proxy cost of carbon at all. That is, the company did not even consistently apply its ‘secret’ internal proxy cost, let alone the $80/tonne price it told investors about.
The brief states: “Documents produced by Exxon’s independent auditor PricewaterhouseCoopers LLP suggest that Exxon simply did not do what it told investors – it did not apply a proxy cost to its valuation or impairment analyses, including to its evaluation of its reserves and other hydrocarbon assets, prior to 2016.”
The OAG says it has failed to locate any internal documents regarding its policy of applying a proxy cost of carbon, found no guidance material on how the policy was to be applied, and concludes that the evidence shows a “widespread lack of awareness among employees of the proxy cost policy, or how it should be applied.”
The evidence as it stands, without the additional documents requested, gives the OAG reason to believe Exxon is in deeper even than was originally suspected.
“Obstruction and obfuscation”
The OAG also chided the company for its failure to cooperate with the investigation – Exxon claims the whole investigation is politically motivated. The filing criticises Exxon for failing to “observe basic requirements for the preservation, collection, production and recovery of electronically-stored information” – notably, the loss of a significant number of emails sent by ex-CEO Rex Tillerson under the pseudonym Wayne Tracker.
Despite Exxon’s aggressive resistance of the investigation, the information in this filing appears to show that the investigation has been well founded, and that the extent of Exxon’s deception may be in fact greater than was even previously contemplated.
Who polices disclosure?
For lawyers and financial experts, lessons from this investigation include the importance of vigilance in respect of climate-related disclosures. Without oversight, companies can pay lip-service to disclosure without following through on their stated policies.
So who does it fall to to police climate disclosure? Investors can be proactive, taking action to hold companies to account on reporting but we need active oversight from the regulators. The G20 will see the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) in July. National finance ministers must ensure these recommendations are implemented in national law, and equip national regulators with robust enforcement powers.
The risks of opacity
ClientEarth recently wrote to BP and Glencore and investors about the legal risks of publishing misleading information on climate risk and climate risk management. These recent Exxon revelations highlight that this risk is real and present.
Exxon’s actions, if proven, have the potential to put shareholder capital at risk by obscuring the value of assets at risk from the transition to a low-carbon economy. Companies must not deceive investors regarding materially financial risks to their business – of which climate risk is clearly one. If investors incur climate-induced losses while the wool is pulled over their eyes, they can and will sue.
Read more about ClientEarth’s Company and Financial project.
Sophie Marjanac, Lawyer (Australian qualified), Company and Financial/Climate Damage .
Sophie joined ClientEarth’s Climate Litigation team in November 2015. Prior to joining ClientEarth, Sophie was a senior lawyer at Clayton Utz, Australia’s largest independent law firm, where she specialised in environmental and planning law. She has also previously worked in the remote Torres Strait region, where she undertook litigation, negotiation and advocacy on behalf of Indigenous Australian landowners.
Sophie was awarded a Bachelor of Laws with first class honours and a Bachelor of International Studies with distinction from the University of New South Wales in 2009.