By Karen Savage
The second day of Exxon’s climate fraud trial kicked off with two witnesses for the attorney general’s office testifying Wednesday that the oil giant has been anything but clear about the way it assesses the risk posed to its business by climate change.
Exxon failed to disclose that it used two different numbers to calculate climate risk, according to testimony by Natasha Lamb, director of research and shareholder engagement for Arjuna Capital and Michael Garland, assistant comptroller for corporate governance and responsible investment for the city of New York.
Their testimony supports claims made by Attorney General Leticia James, who alleges that Exxon violated the Martin Act, her state’s powerful anti-fraud statute. James alleges Exxon committed fraud, deceiving investors by using one set of numbers to calculate climate risk to shareholders while it used different numbers to privately plan how to invest the company’s own funds.
Exxon doesn’t deny it used different numbers, but says it used what it refers to as a proxy cost of carbon assumption to determine future energy demand and a separate number it refers to as a greenhouse gas cost to evaluate investments. It said it considers that normal business practice.
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.
Lamb and Garland both testified that during meetings held with Exxon between 2013 and 2016, company representatives misled them to believe that the oil giant used only one proxy cost of carbon when assessing how climate change would impact the future of its business.
Like other companies, Exxon uses a proxy cost of carbon, or number to represent its best estimate, to determine what the cost of climate change could be in the future. In order to be useful, that number must be consistently applied and communicated to shareholders, something James’ office alleges Exxon failed to do.
Lamb’s testimony centered around disclosures made by Exxon as the result of shareholder pressure.
“In Dec 2013, we filed a proposal with ExxonMobil on carbon asset risks, asking for a report on whether any of their assets are at risk of being stranded,” said Lamb, referring to a proposal filed jointly by Arjuna Capital and As You Sow, a non-profit that promotes corporate social responsibility through shareholder advocacy.
Carbon asset risk refers to fossil fuel reserves that cannot be burned if the world transitions to low-carbon energy and limits greenhouse gas emissions to keep global warming well below 2 degrees Celsius and prevent catastrophic climate change.
Some of Exxon’s most energy intensive projects, such as the Kearl oil sands project in Canada, drew a lot of questions, Lamb said.
“We understood that those projects were most at risk if there were regulations that put a price on carbon,” Lamb said. “We were seeking a report and disclosure so the company would assess what the risk of stranded assets was.”
Lamb testified that shortly after the proposal was filed, she and others met with Exxon representatives, who showed a map reflecting how the company was assessing potential climate costs.
“The map represented the different geographies and that the company was using different proxy cost to assess climate regulations in those different geographies,” Lamb said.
It is appropriate to assess different costs based on region. Companies that operate in countries with more regulations, typically members of the Organisation for Economic Co-operation and Development (OECD), generally incur higher expenses.
“I understood the approximately $80 per ton to reflect the greenhouse proxy cost used in OECD countries,” Lamb said, adding that no one from Exxon explained that the map reflected only costs used when the company predicted future energy demand, not potential costs posed to its investments and projects by climate change.
“What we understood was that the proxy cost represented on the map was being used to manage climate change risk,” Lamb said. The same information was presented on a conference call a few months later.
Investors appreciated what they thought at the time was Exxon’s honesty about its planning, but their concerns lingered about “higher-price, unconventional reserves,” Lamb testified.
Investors continued to press for more disclosure and in March 2014, Exxon had a proposal of its own: In return for shareholders dropping their proposal, the company would provide the additional disclosures.
“We did agree to withdraw the proposal,” Lamb said. Because Exxon had already asked the Securities and Exchange Commission (SEC) to allow the company to block shareholders from voting on the proposal, investors also agreed to consider their opposition to that request moot.
Investors later learned the SEC had ruled in their favor.
“If we had not withdrawn the proposal, it would have gone to a vote,” Lamb said.
At the time, Exxon’s agreement to issue a disclosure on stranded asset risk was touted by both investors and the company as a “landmark agreement.”
“We were disappointed that the company did not take into account a low-carbon scenario,” she said, adding that Exxon continued to mislead investors in the report.
“We are confident that none of our hydrocarbon reserves are now or will become ‘stranded,’” Exxon said in the report, sidestepping shareholders’ demand to know how the company is preparing for carbon asset risk.
Lamb told the court that Exxon continued to fail to acknowledge it was using two distinct proxy costs, one for energy demand and the other for greenhouse gas expenses. She said comments made by Tillerson at the company’s May 2014 shareholders’ meeting furthered the deception.
“Unlike many of our competitors, we have for many years included a price of carbon in our outlook,” Tillerson said at the time. “And that price of carbon gets put into all of our economic models when we make investment decisions as well. It’s a proxy. We don’t know how else to model what future policy impacts might be. But whatever policies are, ultimately they come back to either your revenues or your cost. So we choose to put it in as a cost.”
In an aggressive cross-examination, Exxon attorney Justin Anderson pushed back.
“Where on the map does it say Exxon uses proxy cost of carbon in its investment planning?” Anderson asked.
“What it does say is that the map is from the Outlook for Energy,” Anderson continued, pointing to small text citing the source of the map as the company’s Energy Outlook report, which addresses global energy demand.
“They didn’t say they’re using it as a cost in the project evaluations, did they?” Anderson said.
“What I understood is, they’re using it as part of their investment-making decision, as a cost,” Lamb replied.
“No one told you that the proxy cost of carbon is being used as a cost,” Anderson said.
“It’s called a cost, so that’s what I assumed it was being used for,” Lamb fired back, adding that she saw no reason to question the company further, as the report was issued in response to a request for disclosure of how Exxon was managing the risk posed by climate change to its high risk assets.
“The company described it as being used by the company to evaluate investments,” Lamb said.
The trial will resume on Thursday and continue for the next three weeks. Judge Barry Ostrager is expected to hear from nearly three dozen witnesses, including Exxon employees and securities experts and will also review dozens of depositions and examine hundreds of documents.
Ostrager has said he intends to render a decision no more than 30 days after the trial wraps up.