Colossal fossil ExxonMobil will stand accused of misleading investors by masking tens of billions of dollars in climate-related costs when proceedings get under way next week in a civil case brought by New York State attorney general Letitia James.
At the core of the case is a fact to which the company admits: for years, Exxon kept two sets of numbers to reflect the costs the climate crisis would impose on its business, one for shareholders, the other for in-house management.
Now, “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,” InsideClimate News reports. “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 fraud, it could face substantial penalties.
Exxon lawyers “have argued these different sets of figures did not mislead investors and had distinct and legitimate purposes,” InsideClimate adds. “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.”
The lower carbon cost calculation “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% of the company’s oil reserves.”
InsideClimate has a detailed chronology of Exxon’s move into the tar sands/oil sands, its commitment to the five-billion-barrel Kearl Oil Sands Project north of Edmonton, and the evolution of its double reporting format for climate-related costs, including the role of ex-CEO and former Trump secretary of state Rex Tillerson in sanctioning the reporting strategy.
“Exxon in effect erected a Potemkin village to create the illusion that it had fully considered the risks of future climate change regulation and had factored those risks into its business operations,” New York wrote in its October, 2018 complaint. “In reality, Exxon knew that its representations were not supported by the facts and were contrary to its internal business practices. As a result of Exxon’s fraud, the company was exposed to far greater risk from climate change regulations than investors were led to believe.”
New York says Exxon’s accounting practices cost its shareholders between US$476 million and $1.6 billion.
“In part, the judge’s ruling may rest on semantics,” InsideClimate states. “Exxon asserts that it did in fact disclose that it used something it called a ‘greenhouse gas cost,’ as distinct from its proxy cost, pointing to a sentence in its 2014 report to investors that reads ‘we require that all our business segments include, where appropriate, GHG costs in their economics when seeking funding for capital investments.’ Exxon also says it was clear to investors that the figures behind these internal economic analyses were not disclosed for competitive reasons. The attorney general argues that no reasonable investor would have noticed the distinction between a proxy cost and a greenhouse gas cost.”
Citing financial crimes specialist David Shapiro of the John Jay College of Criminal Justice, ICN adds that to win the case, “prosecutors do not have to prove that Exxon executives were intentionally misleading investors. But they will have to show that the company’s policies had a ‘material’ effect on its stock price,” based on “a precise and technical breakdown of the company’s accounting and business evaluations”.
“The devil is in the details,” Shapiro said. But “conceptually, they have a great case.”