The New York attorney general's investigation of Exxon's potential climate fraud has put a focus on a misleading report about what the company knew about climate risks. Photo credit: Aaron P. Bernstein/Getty Images

By Karen Savage

As part of a deal to get shareholders to withdraw a resolution seeking greater transparency on climate change risks, Exxon agreed in 2014 to provide investors a report on its climate risk calculations. It promised to include how it is planning for the possibility that its assets would be stranded, or unusable due to the costs of future carbon regulation.

Exxon did produce the report, Energy and Carbon—Managing the Risks, but several experts say it was deliberately deceptive.

“The bottom line is that Exxon did not have a good answer to the question of whether its assets are at risk of being stranded,” said Bob Litterman, former head of risk management at Goldman Sachs and currently chairman of the risk committee at Kepos Capital.  

“Exxon wrote a very deceptive report,” he added.

Managing the Risks is one of several documents specifically mentioned in the subpoena issued to Exxon by New York Attorney General Eric Schneiderman, who is investigating Exxon for possible fraud.

Schneiderman’s office is alleging Exxon deceived its investors by using two different accounting methods—one for communicating climate change risk to the public and another kept private for internal projections. In the subpoena, the attorney general demands Exxon produce all documents and communications related to its disclosure of climate change risks—including documents used to compile the Managing the Risks report.

Natasha Lamb, a managing partner with Arjuna Capital, an investment firm that specializes in sustainable investing, which along with As You Sow, a nonprofit dedicated to corporate responsibility, initiated the 2014 shareholder resolution, said she was initially optimistic about Exxon’s report.

“It was almost an about-face on how they were dealing with investors on climate change and so we were optimistic certainly that it would be a thorough, candid approach to the issue—but that did not come to fruition,” said Lamb.

“Exxon spent 30 pages denying the risks of climate change in a climate change report, so there’s a lot of irony involved.”

In Managing the Risks, Exxon said it “takes the risk of climate change seriously and continues to take meaningful steps to help address the risk and to ensure our facilities, operations and investments are managed with this in mind.”

But when addressing how it is planning for the possibility of stranded assets, or whether or not the present oil and gas reserves it controls would be recoverable—also referred to as carbon asset risk—Exxon said climate change would not result in the stranding of its assets.

“We are confident that none of our hydrocarbon reserves are now or will become stranded,” Exxon said, sidestepping shareholders’ demand to know how the company is preparing for carbon asset risk.

Exxon defends this claim by asserting that  the possibility of transitioning to a “low carbon scenario” —or one that would keep world temperature increases to no more than 2 degrees Celsius by 2100—is “highly unlikely.”

To support this position, Exxon provided data indicating the cost of transitioning to a “low carbon scenario” would be staggering to consumers and “beyond those that societies, especially the world’s poorest and most vulnerable, would be willing be bear.”

Litterman said that’s just not true.

“To bolster its argument that its reserves couldn’t possibly be stranded, Exxon foolishly decided to make a ridiculous claim — that moving to a low-carbon economy will be incredibly expensive, eventually taking up 44 percent of the median American family income,” he said, adding that the real figure is likely less than 5 percent.

Lamb said Exxon’s calculation was the most striking dissonance between what fossil fuel companies want the public to think will happen and what scientists expect to occur over the next several decades.

“The information presented in the Managing the Risks report is really the smoking gun for current climate change risk denial and in particular that 44 percent number that we spoke about is, I think, problematic for Exxon,” said Lamb, adding that Exxon’s institutional investors are still waiting for Exxon to be fully transparent.

Because the 44 percent figure is so far from what scientists had reported, Lamb said the report is likely raising red flags in Schneiderman’s investigation.

The 44 percent number appeared in a graphic Exxon created that sparked more questions than it answered. In the graphic, Exxon created a table of projected additional costs to American families based on data from the U.S. Energy Information Administration (EIA), the Environmental Protection Agency and the U.S. Census. Exxon’s table was placed alongside a graph of a 2007 model of the potential costs of carbon that was created by the U.S. Climate Change Science Program at MIT.  

John Reilly, co-director of the Joint Program on the Science and Policy of Global Change at MIT, said that while his data were accurately reproduced, their placement in the graphic was misleading.

“I have spoken with folks at Exxon and they have indicated they had no intention to misrepresent our work,” said Reilly.

“However, the way their table was situated beside a graph of our GHG price data, it led many readers to conclude that their estimates were ours,” he said, adding that it’s important to him that readers know that was not the case.

“The Exxon calculations showed the ‘cost’ to the average household in the tightest stabilization target to be 44 percent of their income,” said Reilly. “This is a factor of 10 or 20 times what we would estimate.”  

Exxon graphic from its Managing the Risks report

Reilly said for the low-carbon scenario, his team estimated future costs to be only about 2.1 percent of the average household income—and that’s if the cost is spread proportionally across the economy.

“If in a lump sum, [an] equal amount to each person or household, we have found that well over half of American households—those with lower incomes, would actually come out ahead,” said Reilly.

He added that if a low-carbon scenario were to reduce costly climate change damages, the cost to average American households could be even lower.

Exxon did not respond to a request for comment, but on the day the Managing the Risks report and another climate-related document were released, Ken Cohen, then Exxon’s vice president for Public and Government Affairs, commented on the company’s website.

“I encourage you to read these reports to shareholders—which can be accessed here— along with our Outlook for Energy and recently released 2013 Financial and Operating Review. They give a good flavor of how our corporation makes investment decisions and how we view the future,” he said.

Litterman, who has a short position in ExxonMobil stock as part of a stranded asset total swap return—a bet that stranded assets will underperform the S&P 500—said Exxon was deliberately deceptive in communicating the carbon asset risks in those decisions.

“They should be held responsible for that,” he said.

“This was a report to shareholders who asked a legitimate question—is it possible that your assets might be stranded by a move to a low-carbon economy. And Exxon’s answer is “absolutely not”—well that’s a lie, their assets are being stranded every day already.”  

Since that report, shareholders have persisted in calling for the company to be transparent. A shareholder proposal calling for Exxon to disclose how it is preparing for a transition to the “low carbon scenario” recently passed with a 62 percent vote.

In a supporting statement, shareholders said, “Exxon’s peers, which include BP, ConocoPhillips, royal Dutch Shell and Total have all endorsed 2 degrees scenario analysis.”

Exxon’s management opposed the proposal.

Litterman said Exxon argued that their shareholders should not require additional transparency on the impacts of moving to a low-carbon economy because they’d already addressed that issue in Managing the Risks, which they’d written three years ago.

“And their shareholders said ‘No, we’re not buying that’,” said Litterman.

Lamb said Exxon can expect more pressure regarding its climate change risk reporting.

“Once institutional investors are requesting this information, they’re not going to stop,” said Lamb.

“Investors think the company would be well served by addressing the risk head on and having appropriate strategies to mitigate it and right now, that’s just not the case,” she added.

“That 62 percent vote is so remarkable. You’ve got the Vanguards and the BlackRocks of the world voting for transparent climate change risk reporting and that’s a sea change from where we were before,” said Lamb.

Whether Exxon will be responsive to demands for transparency from shareholders and the New York attorney general’s office is yet to be seen.

“It’s interesting to see them dig their feet into the mud when technology and global conditions are changing,” said Lamb.

Litterman said stranded assets and transparency aren’t all Exxon has to worry about.

“They have to be concerned with potential liability. At some point in the future we’re going to price carbon, we’re going to move quickly to a low-carbon economy and there’s going to be trillions of dollars of damages nonetheless,” said Litterman.

“And people are going to say ‘how did this happen, who’s responsible’ and someone’s going to point a finger at Exxon—and I’m sure they know that. I’m not sure shareholders at Exxon have thought much about it, but management is clearly aware.”

“This problem, which is immense, which is an existential threat to the planet, did not have to happen. And someone’s going to have to ask who’s responsible for that, and Exxon is doing its damndest to get off the hook.”