Costly fossil fuel projects, including in Canada's oil sands, put companies at risk of more investor lawsuits, a new study says.Costly fossil fuel projects, including in Canada's oil sands, put companies at risk as the world moves to a low-carbon future, potentially sparking more investor lawsuits. Photo credit: Mark Ralston/Getty Images

By Dana Drugmand

With the oil industry continuing to invest heavily in projects all but assured to lose money as the world moves toward a lower-carbon economy, as a study published last week shows, investors may increasingly turn to shareholder lawsuits to protect their investments.

That study, by the financial think tank Carbon Tracker, said oil and gas companies invested $50 billion last year in projects that are incompatible with the goal of the Paris Agreement to limit global warming to well below 2 degrees Celsius (°C). Those investments could result in weak returns and investor losses as the world transitions to cleaner energy. The 18 projects highlighted in the report are expected to be “deep out of the money in a low-carbon world,” the authors said

“In making investment decisions, company directors are legally obliged to have regard to material climate-related financial risks, including stranded asset risk,” said Peter Barnett, an attorney with the nonprofit environmental law organization ClientEarth. “We expect to see much greater shareholder scrutiny, and indeed litigation, over large-scale investment in fossil fuel assets that will not be profitable in a low-carbon world.” 

Those shareholder lawsuits have already begun. Two similar suits against ExxonMobil were recently consolidated into one case by a federal judge in Texas, both accusing the oil giant of lying to the public about the risks of climate change to its business. Another suit was filed against Exxon last month in federal court in New Jersey by a mutual fund that said the company’s executives “knew, were reckless, or were grossly negligent in not knowing” that Exxon was misleading its investors.

Those suits and others previously filed have cited information unearthed by the New York attorney general’s office, which in a three-year investigation of the company found it used two sets of data to account for climate risks, one it shared with the public and one it used for internal calculations. That finding prompted the New York AG to file a securities fraud lawsuit against Exxon that will go to trial in October.

Now, the Carbon Tracker report adds more fuel to the argument that oil companies are not being honest with their investors about what global climate action means to their business.

The report is the first to look at individual carbon projects that are inconsistent with a low-carbon scenario. It said Exxon, Chevron, Shell, BP, Total, ConocoPhillips, Eni, and Equinor each sunk at least 30 percent of their capital investment last year into projects that are not aligned with limiting warming to 1.6 degrees C—the most ambitious low-emissions scenario used by the International Energy Agency. 

“Every oil major is betting heavily against a 1.5˚C world and investing in projects that are contrary to the Paris goals,” said Andrew Grant, senior analyst at Carbon Tracker and co-author of the report. “Investors should challenge companies’ spending on new fossil fuel production. The best way to both preserve shareholder value in the transition and align with climate change goals will be to focus on low-cost projects that will deliver the highest returns.”

Among the high-risk projects are Shell’s $13 billion liquefied natural gas project in Canada and a deepwater oil project in Angola in which BP, Exxon, Total and Equinor have invested $1.3 billion. 

Carbon Tracker warns that higher-cost projects that rely on higher prices have the most risk of becoming stranded assets—reserves that will have no value—as petroleum supply outstrips demand. Of all the oil majors, Exxon has the greatest risk with more than 90 percent of potential spending from 2019-30 on new projects outside a 1.6˚C pathway, according to the report. Exxon is followed by Shell (70 percent high risk), Total (67 percent), Chevron (60 percent), BP (57 percent) and Eni (55 percent).

BP chief executive Bob Dudley said on Wednesday that his company plans to sell some of its most carbon-intensive projects to align the company with the Paris goals.

Exxon did not respond to a request for comment on the issue. A Chevron spokesman said the company expects oil demand to grow. 

“Most outlooks we track conclude that oil and gas demand will continue to grow over the coming decades, but we also track and analyze leading indicators that might signal change, such as potential policy developments,” Chevron’s Sean Comey said via email. 

Danielle Fugere, president of shareholder advocacy organization As You Sow, said that the oil majors are failing to anticipate declining demand for their products. 

“There’s risk associated with these investments. Currently there continues to be demand for oil and gas, but the question is how long will that demand be sustained,” she said. 

“Frankly almost every company will be caught with stranded assets,” Fugere said. “At some point, the market will just flip and there will be a host of companies that are no longer viable.”  

“Red Flag for Investors” and Rise of Litigation  

Investors, including a coalition with assets worth $34 trillion called Climate Action 100+, are increasingly pushing companies to disclose their climate risks and ensure that their investments are aligned with the Paris Agreement. But conventional shareholder engagement has resulted in minimal success. 

“What we know from this report is not a single oil and gas company is Paris-aligned,” Fugere said. “This is yet another red flag for investors.”

Fossil fuel companies are already facing lawsuits on various climate-related grounds, presenting financial and reputational risks for the companies’ shareholders. A handful of municipalities, the state of Rhode Island, and a commercial fishing association are suing the companies seeking compensation for billions of dollars in climate damages and related costs of adapting to inevitable impacts. More states could join in filing their own climate suits. 

“There still is significant litigation risk, as there should be because those states are on the front lines in terms of having to pay for damage,” Fugere said. 

Shell is also facing a climate lawsuit in the Netherlands for failing to align its business model with the Paris Agreement. The plaintiffs, seven nongovernmental organizations, say that Shell’s carbon reduction targets are insufficient and constitute human rights violations. 

In a statement responding to the Carbon Tracker report, Shell highlighted its “ambition” in responding to climate change. 

“We agree that the world is not moving fast enough to tackle climate change. Shell is acting now and this is being recognised by investors,” Shell spokeswoman Anna Arata said via email. “We have set an ambition to reduce the Net Carbon Footprint of the energy products we sell by around half by the middle of the century, in step with society as it moves towards meeting the aims of Paris. As the energy system evolves, so is our business, to provide the mix of products that our customers need and ensure that Shell continues to be a world class investment case through the energy transition.” 

Despite these public statements and expressed commitments, Shell and other major oil and gas companies continue to cling to their core business: producing products that drive further climate destabilization.  

“All of these companies are going forward in various degrees with business as usual,” Fugere said. 

Rob Schuwerk, executive director of Carbon Tracker in North America, said this kind of business-as-usual investment doesn’t square with claims of supporting the Paris Agreement.  

“The research does suggest that it will be increasingly difficult for companies to both claim adherence to a Paris compliant pathway and sanction hydrocarbon projects on a business-as-usual basis and therefore we hope that companies are taking analysis like ours into account when characterizing their emissions reduction efforts,” Schuwerk said. 

He explained that the report’s findings do not necessarily signal a liability risk for the oil companies. “The question of liability (for securities fraud) depends on whether a company has made a material misstatement or omission of a material fact, whether it was knowing, whether the investor relied on it and whether the investor suffered a loss caused by the material omission or misstatement,” he said. 

The current lawsuits, as well as potential new ones, will begin to answer that question.

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