By Karen Savage
In its opening arguments in the People of New York v. ExxonMobil, the New York attorney general’s office emphasized that the lawsuit hinges not on whether the oil giant properly calculated the risk that climate change poses to its business, but whether it was honest with the public and investors about those calculations.
The case opened Tuesday in New York Supreme Court, with Judge Barry Ostrager hearing the first arguments in a trial that will decide whether Exxon deceived investors in violation of the Martin Act, New York’s powerful anti-fraud statute. If New York Attorney General Letitia James succeeds in proving fraud because Exxon use of one set of numbers to calculate climate risk to shareholders while using a different number to privately plan how to invest the company’s own funds, it could cost the company between $476 million and $1.6 billion, the approximate amount James said the deception cost Exxon’s shareholders. The AG’s office is asking the court to create a shareholders’ restitution fund.
The trial is scheduled to last three weeks and include millions of pages of company documents as evidence.
Exxon didn’t deny that it used different numbers, but said they did not represent fraud. The company said it used the proxy cost of carbon number to determine how climate-related regulations might affect the future demand for energy. The other number—the greenhouse gas (GHG) cost—was used to calculate the costs climate-related regulations might have on potential projects.
The oil giant maintains it has made accurate disclosures about the two numbers to investors and says the AG’s office is “twisting the content of those disclosures” to make it appear as though it misled the public.
What The AG’s Office is Saying
Kevin Wallace, acting chief of the attorney general’s investor protection bureau, began by telling the court what the case is not about.
“We are not telling ExxonMobil its proxy costs were too high or too low,” Wallace said, adding that the AG’s office is not trying to tell Exxon how to manage its business.
Wallace said it is, however, telling Exxon it must obey the law. “What the law demands is that ExxonMobil not mislead its investors.”
He also said Exxon was fully aware that its climate change disclosures were material—or significant—to investors, as the company acknowledged on SEC filings.
The AG’s office contends that as shareholders became increasingly concerned about the risks posed to their investments by climate change, they pressed Exxon to disclose how it was managing those risks.
Exxon wrote in its Energy Outlook report for 2013 that it “assumes a cost of carbon as a proxy for a wide variety of potential policies that might be adopted by governments over time to help stem GHG emissions.”
A proxy cost is a company’s best estimate of what future climate change regulation will cost the company. In order to be useful, the proxy cost must be consistently applied and communicated to shareholders, something the AG’s office alleges Exxon failed to do.
In published reports and other disclosures, Exxon said that in certain countries it “expects the implied cost of CO2 emissions to reach about $80 per ton in 2040” and “about $60 per ton” in 2030.
Wallace said at the same time, Exxon’s own internal Dataguide instructed employees to use a greenhouse gas proxy cost of only about $40 when making internal calculations for 2030 and provided no guidance for the 2040 cost.
Exxon published another report in March 2014 after investors pressed for more disclosures.
The AG’s office alleges that those publications, Energy and Climate and Managing the Risks, were even more deceptive, purporting in one to apply in greenhouse gas costs to its projects and assets around the world and representing in the other that it “requires all significant proposed projects include a cost of carbon.” Exxon also said it was “confident that none of our hydrocarbon reserves are now or will become ‘stranded,’” and said it “does not believe current investments in new reserves are exposed to the risk of stranded assets.”
“While ExxonMobil noted that it applied different GHG proxy cost values in different geographic regions, the company did not disclose that it applied lower GHG proxy costs—or, in some cases, no GHG proxy cost at all—to its GHG emissions in its cost projections,” said the AG in a court filing.
Exxon has argued its employees had the option to ignore the publicly represented greenhouse gas proxy costs, Wallace told the court.
He said Exxon has argued that it disclosed that to shareholders in a sentence in Exxon’s Managing the Risks report that read, “Perhaps most importantly, we require that all our business segments include, where appropriate, GHG costs in their economics when seeking funding for capital investments.”
That wording appears in conjunction with a map showing “the very regions where Exxon thought it was appropriate to apply that cost”, Wallace said, adding that Exxon has “flipped reality on its head” and “claims this sentence is the whole basis for the AG’s suit.”
“The phrase “where appropriate did not disclose that ExxonMobil used much lower GHG proxy costs than it publicly represented—particularly for the GHG-intensive assets most exposed to carbon asset risk,” said the AG in court filings, adding that the language must be read in the context of the rest of the report, which “specified that GHG proxy costs were used for ‘all significant proposed projects.’”
Wallace told the court Exxon’s deception was done with the “hands-on involvement” of Exxon’s senior management, including former chief executive Rex Tillerson, who is expected to testify during the trial. Tillerson said in a deposition earlier this year that he was involved in drafting and editing Exxon’s disclosures.
Wallace said the AG’s office will present emails and other internal documents showing that Guy Powell, Exxon’s greenhouse gas manager, “realized what ExxonMobil was telling its investors was actually out of line with what it had been doing,” he suggested the company align the numbers.
Rather than issue a correction, Exxon continued to deceive investors, Wallace said.
“This is a damning admission that its internal projections were in contrast to its external reports,” Wallace said. “Ultimately, though, ExxonMobil never did align those costs. It didn’t align those costs. Why not? Because it was too painful.”
The AG’s office said it will present evidence revealing that Exxon, without telling investors, used a third, “alternative method” to calculate risk to some of its more carbon intensive projects, including the Alberta oil sands and a gas field in Mobile Bay. Wallace said if Exxon had honestly disclosed climate risks, there would have been “large write-downs” or devaluing, of its assets.
“At the end of the day, the real question of this trial is what a reasonable investor would have believed from ExxonMobil’s disclosures,” Wallace said.
Theodore V. Wells, lead attorney for Exxon, opened by telling the court that Exxon has long acknowledged that climate change is real, but that it is a global problem that must be addressed by governments.
“The problem of climate change does not permit the New York attorney general to bring a meritless complaint and one that is so disconnected from the truth,” Wells said. “ExxonMobil did nothing wrong, absolutely nothing wrong. The evidence will show that the allegations in the complaint are bizarre and twisted and not connected to the truth.”
It was under the direction of Tillerson that Exxon began considering the risks of climate change, Wells said.
He said the company uses two different numbers because it looks at the ways future climate-related regulations affect the global demand for energy, as well as the impact regulations will have on specific projects.
A proxy cost looks at policies that would reduce global demand, Wells said. “The purpose of greenhouse gas costs were to determine what impact regulations could have on certain ExxonMobil project.”
Wells maintains that through the years investors have wanted accurate climate-related disclosures, but maintains that they “don’t care which projects are being analyzed or the 2040 projections.”
“They weren’t down in this granular level of detail,” Wells said. “We told them we were managing the risks.”
Exxon maintains that contrary to the contention that the company was cheating investors, the AG’s allegations, if true, would only indicate it was cheating itself.
“Why in the heck would you want to low-ball yourself?” he said. “If they’re right, it’s a whole illusion to rip ourselves off.”
Wells said Exxon will present witnesses, including Tillerson, who will testify that the AG’s office has taken sentences and statements out of context. He also said Exxon’s witnesses will testify that the AG’s “third-party witnesses cannot establish materiality” and will disprove the allegation that risks to Exxon’s projects were miscalculated.
Wells also pushed back on the AG’s criticism of the words “where appropriate” as used in Exxon’s 2014 Managing the Risks report. In court filings, Exxon said that the AG’s office has misinterpreted that sentence when it says the sentence means Exxon “described its proxy cost as a unitary concept that applies across its business units and functions.”
Wells said the sentence is located in the middle of a paragraph that addresses both the future demand for energy and the costs of greenhouse gas regulations on potential investments.
“If read in context it is clear that proxy costs relate to the demand side and greenhouse gas costs relate to what we do on the expense side,” Wells said, adding that the phrase “‘where appropriate’ can’t be an actionable statement for purposes of a securities fraud case.”
Wells concluded by discussing what he called the “elephant in the room” or the real reason for the trial. He alleged that the “improper, baseless, meritless complaint was filed” because former attorney general Eric Schneiderman “formed an improper alliance with activists” as evidenced by an agenda from a January 2016 meeting which Wells said was “almost like the Russians trying to interfere with the election.”
Wells went on to theorize that the suit was filed because Schneiderman participated in a March 2016 press conference with Al Gore and a newly formed coalition of attorneys general announcing that the coalition would work together in a multi-state effort to address climate change. Schneiderman said then that the AGs would investigate fraud on the part of the fossil fuel companies.
“Once they gave that press conference, in all due respect, Your Honor, they could not clear ExxonMobil,” Wells said.
Schneiderman, who began investigating Exxon in 2016, resigned in May 2018. He was replaced by Barbara Underwood, who continued the investigation and filed the suit last year. Leticia James, who was elected earlier this year, is litigating the case.
Ostrager has set aside three weeks for the trial and said he anticipates issuing a verdict within 30 days of its conclusion.