Exxon’s lawyers can’t catch a break. Frankly, neither can Rex Tillerson.
In 2015, former New York Attorney General Eric Schneiderman subpoenaed Exxon financial records, emails, and other documents to investigate the company’s climate-change related disclosure dating back to the 1970s. Soon thereafter, the Massachusetts Attorney General joined the investigation. Exxon claimed that the probes were politically motivated and attempted to block them in court, but its efforts failed in March 2018.
However, the legal battle continues. A Republican coalition including 10 state attorneys general and two governors signed an amicus brief in August urging the court to reverse its decision and close the investigation. Exxon is also appealing to the Supreme Court regarding the requests from Massachusetts Attorney General Maura Healey, arguing that its connection to the state is not significant enough to warrant the probe.
The issue went national in 2016 under the Obama Administration when the SEC commenced an investigation into the company’s asset valuation practices in light of climate risk. Since oil prices dropped in 2014, Exxon was the only major U.S. oil producer which hadn’t taken a write down or impairment. On August 2, 2018, concurrent with the EPA’s announcement that it would roll back Obama’s vehicle emission standards, the SEC announced that it dropped the probe without any recommendations for enforcement action.
Now, Exxon is now being pressed on the issue from within its own ranks. Just two weeks after the SEC’s announcement, a federal judge in Texas denied the company’s attempt to kill a class-action lawsuit filed by employees in 2017. Led by the Pennsylvania Carpenters Pension Fund, the plaintiffs filed the suit under the Employee Retirement Security Act (“ERISA”) and are alleging that the company’s stock price was negatively impacted by misleading reassurances that write downs were unnecessary.
One of the key arguments in the case is that Exxon misled the public about its asset valuation in order to protect its March 2016 $12 billion public debt offering from the harm caused by a lower credit rating. Specifically, in a similar case brought by the New York Attorney General, it was found that Exxon made internal calculations using a lower proxy cost of carbon than what it reported to the public. Because this metric includes forecasted costs incurred by future climate regulation, the argument can be made that Exxon was effectively misleading the public about how it valued the effects of climate change to its business.
Further, by making projects seem cheaper than they really were, Exxon would be able to avoid costly impairments experienced by its peers. The court noted that a 2010 email with an Exxon employee appears to demonstrate that employees were aware of the fact that the firm’s lower internal proxy cost of carbon was less realistic than the value reported to the public. The court concluded that “A reasonable investor would likely find it significant that ExxonMobil allegedly applied a lower proxy cost of carbon than it publicly disclosed.”
Setting aside allegations of securities fraud at one of the country’s largest public companies, the case is also fascinating to the ESG community because it has highlighted climate risk as a bona fide issue in the boardroom. Former Exxon chair and CEO (and briefly, Secretary of State) Rex Tillerson served on the company’s management committee. According to the plaintiffs, the management committee would have known about the discrepancy between the public proxy cost of carbon and the true value used internally. As such, this “supports finding a strong inference of scienter” as to Exxon and Tillerson.
If the pension fund wins the case, it will mark the first time that a director is found liable for climate risk. Regardless, the suit proves that climate risk reporting is not merely an exercise, but a critical source of information subject to close investor scrutiny.
Max is an analyst covering environmental, social and governance issues.