NEW YORK—Using his state’s powerful anti-fraud statutes, New York Attorney General Eric Schneiderman is taking a deep dive into Exxon’s climate change accounting and its communication with investors.
At issue is whether Exxon defrauded investors by using two different accounting methods to project climate change-related risks the corporation will eventually have to absorb.
In a recent filing, John Oleske, lead attorney for Schneiderman’s office, said his team has “uncovered significant evidence of potentially materially false misleading statements by Exxon about its application of a proxy cost of GHGs [greenhouse gas emissions] to its investment and impairment decisions.” Oleski want on to suggest the exercise used to inform investors may be a “sham.”
A corporation’s future profitability is calculated using by an estimate—or proxy cost—to represent the price the corporation must pay for potential future climate change-related regulations implemented by local governments, such as those put in place to reduce greenhouse gas emissions. A proxy cost is also used to determine future energy demand. But while the proxy costs can vary based on use and geographical location, those costs must be consistently applied in both internal and external communication.
John Oleske, lead attorney for the attorney general’s office, alleges that documents produced by Exxon indicate the corporation utilized two different proxy costs from 2010 through June 2014, using one proxy cost internally, while communicating another externally to investors.
“Exxon represented to investors and the public that it was incorporating higher costs of GHG [greenhouse gas] regulation into its business decisions than documents indicate that it actually was using, thereby potentially misleading investors and the public about the extent to which it was protecting its business from regulatory risks related to climate change,” said Oleske in a June 2 court filing.
Schneiderman is not the only one to see potential problems.
“The attorney general has far more access than we do into the books and records of the company but his findings seem consistent with our deductions made from reading 10Ks and transcripts,” said Tom Sanzillo, author of “Red Flags on ExxonMobil,” a 2016 report published by the Institute for Energy Economics and Financial Analysis (IEEFA). Sanzillo, director of finance for IEEFA, is a former deputy comptroller of New York State, a role that included overseeing a $156 billion pension fund and $200 billion in municipal bonds.
In the Red Flags report, Sanzillo predicted that Exxon, like other fossil fuel companies, will become smaller as countries transition to other energy sources to combat climate change. The report outlines several indicators that Sanzillo says predict a decline in Exxon’s profitability. He said Exxon has a responsibility to be transparent with its shareholders
“These are irregularities in the reporting which require deeper investigation and those investigations appear to be taking place,” said Sanzillo.
Exxon lead attorney Theodore V. Wells said there’s nothing in the documents to back up Schneiderman’s claims or to warrant further investigation.
In a June 9 filing, Wells said there’s nothing improper with Exxon’s reporting and said documentation “actually confirms that ExxonMobil is doing what it says it is doing: incorporating a proxy cost of carbon into its energy demand outlook and GHG costs into its project economics.”
Wells went on to say the corporation uses proxy carbon cost estimates two different ways: when assessing the impact of greenhouse gas regulation on global energy demand and when assessing the cost of regulations on specific projects.
“Considering the different purposes of those two exercises (assessing potential global energy demand over time on the one hand, and evaluating likely economics of specific projects on the other), it is unsurprising that different figures would be used,” wrote Wells, who added that Exxon has never claimed “it relied on one set of figures for all purposes, and a reasonable investor would not draw such a conclusion from ExxonMobil’s public statements.”
But Schneiderman’s investigation focuses on the potential discrepancy between figures Exxon used internally and those it disclosed to investors.
Oleske noted that based on emails, “the discrepancy was known at Exxon’s highest levels” and “Exxon’s Corporate Greenhouse Gas Manager acknowledged as early as 2010 that the publically disclosed proxy cost figures were ‘more realistic’ than those Exxon actually used.”
According to Oleske, Exxon has not produced evidence indicating that it used a consistent proxy cost analysis for internal and public communication and said even Exxon employees lacked awareness of the corporate proxy cost policy.
“Exxon failed to apply the proxy-cost analysis to its impairment decisions prior to 2016,” said Oleske.
Impairments are assets that have a lower market value than what the corporation lists on its books.
Corporations often devalue—or write-down—impaired assets, something Exxon has historically been reluctant to do.
Generally-accepted accounting principles (GAAP) require a corporation to follow certain steps to determine if an asset is impaired. Oleske said a key requirement is that the corporation use the same proxy cost used in its other business decisions, something he says Exxon did not do.
Wells said Exxon followed all GAAP requirements, adding that Exxon is not required to use the same proxy costs for impairment decisions it uses for estimating oil and gas reserves or for estimating global energy demand.
“ExxonMobil’s use of different metrics, in different circumstances, to accomplish different goals evinces prudent financial stewardship, applying appropriate assumptions in appropriate cases. There is nothing untoward or surprising about any of this,” Wells said.
According to Oleske, Exxon further mislead investors in a 2014 report in which it states it was “confident that none of [its] hydrocarbon reserves now or will become ‘stranded’.”
An Exxon email regarding the report indicates an Exxon vice president for investor relations suggested removing a footnote using the word “impairment” because “that word gives the folks on the third floor heartburn.”
Exxon did not respond to a request for comment and a representative from the attorney general’s office declined to comment. In a recent hearing, Wells said Exxon has “moved heaven and earth” to produce documents and called the investigation a “political witch hunt.”
Sanzillo said Exxon’s handling of the investigation is “seriously defective” and the company’s attempts to dismiss the investigation as politically motivated could alarm shareholders.
“The political strategy being followed by the company is not likely to solve the disclosure problem, get to a path for a working consensus on climate or contribute to a new financial plan that improves company profit,” he said.
Exxon’s strategy is also unlikely to appease Schneiderman, who wants more information.
In a hearing on June 16, Oleske, said the attorney general’s office is “deeply unsatisfied” with documents he says Exxon “begrudgingly gave” in response to the investigation.
Oleske said although Exxon has produced nearly 3 million pages of documents, the corporation has shown nothing indicating it incorporated “a proxy cost of GHGs into the economic models of cash flows used in determining whether a trigger for impairment testing existed or whether Exxon’s assets were actually impaired prior to 2016”—the year after the investigation began.