By Karen Savage
Both sides delved into details of a potentially deceiving map shared with investors as Exxon’s climate fraud trial continued Thursday in New York.
On the stand Thursday was Exxon vice president and controller David Rosenthal, who formerly headed investor relations for the company. He defended the map, which was titled “Greenhouse Proxy Costs Increase” and was shared with groups of shareholders. A legend indicates the map was shaded to depict “CO2 ‘Proxy’ Cost,” but Rosenthal testified it was not an accounting of greenhouse gas costs.
Confusing and seemingly contradictory communications about proxy costs and greenhouse gas costs lie at the heart of New York Attorney General Leticia James’ allegations. Her office claims that Exxon deceived investors by failing to disclose that it used one number to calculate climate risk that was shared publicly with shareholders while internally it used different numbers to privately plan how to invest the company’s own funds. After a lengthy investigation, James’ office last year charged Exxon with violating the Martin Act, New York’s powerful anti-fraud statute.
Exxon doesn’t deny it used different numbers, but says it used what it refers to as a proxy cost of carbon to determine future energy demand and a separate number it refers to as a greenhouse gas cost to evaluate investments. The oil giant says those are different calculations and maintains it has made accurate disclosures about the two numbers to investors.
Attorney Kim Berger, chief of the AG’s internet and technology bureau, pressed Rosenthal for details on climate change-related proposals filed in late 2013 and early 2014 by shareholders eager to understand how the company was managing the risks of climate change.
Exxon has said its March 2014 Managing the Risks report was released in response to those requests.
Rosenthal testified that after receiving the proposals, he met with a large group of investors in New York in December 2013. In it, Exxon officials presented the map in question, which Rosenthal said, “has nothing to do with greenhouse gas costs.”
“What we were conveying here was that as we looked out into the future, governments could take a number of actions to suppress the demand for fossil fuels,” Rosenthal said, adding that the company considered all actions that could be taken and came up with a “proxy cost of carbon” to represent actions that could decrease the demand for fossil fuels.
Natasha Lamb, director of research and shareholder engagement for Arjuna Capital, which filed one of the proposals, testified Wednesday that the map was deceptive. She said no one from Exxon explained that it reflected only costs used when the company predicted future energy demand, not potential costs posed to its investments and projects by climate change.
Rosenthal confirmed that investors were never directly told that the map reflected future demand for energy or that it had been pulled from Exxon’s annual Outlook for Energy report, which addresses energy demand.
Small text under the map sites the source as Exxon’s 2013 Outlook for Energy.
The map is titled “CO2 ‘proxy’ cost,” and includes text explaining “assumed cost of CO2 emissions associated with public policies in 2040 in 2012 dollars.” The map shown at the Dec. 2013 investors’ meeting gives no such explanation.
The map was again reproduced in Managing the Risks, under the title “CO2 Policies,” with the label “CO2 ‘proxy cost’ and same text used in the Outlook.
Rosenthal testified that nowhere in Managing the Risks did Exxon specifically say it had a separate process for the evaluation of future investments.
He said the transition words “where appropriate,” written in a single sentence in a paragraph on the page following the map disclosed that process to investors.
“Perhaps most importantly, we require that all our business segments include, where appropriate, [greenhouse gas] costs in their economics when seeking funding for capital investments,” Exxon wrote in Managing the Risks.
Rosenthal said he was unaware that shortly after Managing the Risks was published Exxon’s greenhouse gas manager raised concerns that the report implied that the company was using the higher proxy cost of carbon in planning for future investments.
Under cross-examination, Theodore V. Wells, lead attorney for Exxon, walked Rosenthal through an overview of the Exxon’s terminology and a brief summary of its planning processes.
Rosenthal testified that the term “proxy cost of carbon” refers to Exxon’s best estimate of any action or policy that will reduce the global demand for all energy, not just energy provided by the company. Examples include rebates on electric cars, an increase of solar-powered infrastructure and subsidies to wind companies.
The purpose of Exxon’s Energy Outlook, which has been released annually for many years, is to examine the global demand for energy, Rosenthal said, For those calculations, the company uses the proxy cost of carbon, combined with other calculations, to determine energy demand: how much energy the world will need, how much of that need can be supplied and where that energy will come from. The information can then be used to project future oil and gas prices.
“That’s why we tell our investors that everything we’re doing can be tied back to the Outlook,” Rosenthal said.
Rosenthal said the proxy cost of carbon is used to create the energy demand projections, which is reflected in the Energy Outlook. That in turn helps calculate price assumptions used to plan and budget for proposed project and investment planning.
He said greenhouse gas costs, which are different values, are the estimated expenses to specific projects caused by the potential future regulation of greenhouse gases. Examples of expenses could include taxes on greenhouse gas emissions and other climate change-related costs imposed by governments.
Rosenthal said Exxon includes standard greenhouse gas cost suggestions in its DataGuide, an internal planning document, but the company’s planners aren’t required to use those numbers when budgeting for future projects. Planners are encouraged to use actual numbers specific to the project’s location, when possible, and to consult Exxon’s internal greenhouse gas experts when evaluating the impact of future greenhouse gas regulations on potential future investments.
Wells concluded by questioning the nature of requests by Lamb and other investors for the company to disclose how it was managing climate risks.
Rosenthal said it was his understanding that the shareholders weren’t looking for detailed disclosures, which might involve proprietary information, but were simply looking for “a high level, broad discussion, something that says ‘we read what you said and gives us something that demonstrates your commitment’ to addressing climate risk.”
Wells showed the court a letter in which Rosenthal told Lamb he was proposing Exxon expand its disclosure “to further explain why our proxy cost of carbon is not the only factor we consider in assessing investment opportunities.”
Shortly thereafter, Exxon released its Managing the Risks report, which Rosenthal said was the first time the company had disclosed it used a greenhouse gas cost as an expense when planning.
“Even though you didn’t tell them orally, you did communicate it, didn’t you?” Wells asked.
“Uh-huh,” Rosenthal responded.
In her redirect, Berger pointed to wording in the shareholder proposals indicating investors wanted disclosures on the specific strategies Exxon was using to address its climate risk, something that would amount to far more than a “broad discussion.”
Berger again asked Rosenthal where in Managing the Risks it was disclosed to investors that Exxon used the separate set of greenhouse gas costs to plan future investments.
“Without picking out words and specific things, in the context and flow of the document, I would assume a person who had taken part in our discussions would have no problem understanding that,” Rosenthal said, referring to the Dec. 2013 meeting, as well as subsequent conversations with certain investors.
Referring back to Managing the Risks, Berger highlighted the sentence Rosenthal said disclosed to investors that Exxon required—“where appropriate”—that its planners include greenhouse gas costs when considering capital investments.
“Investors should have understood there was a whole different set of numbers because you used the words ‘where appropriate’?” Berger asked.
Berger wrapped up by again asking Rosenthal if the first time Exxon had disclosed publicly that it used a separate set of greenhouse gas costs to evaluate future investments was in the 2014 Managing the Risks report.
“Yes,” Rosenthal replied.
“Have you made any subsequent disclosure of that?” Berger asked.
“Not that I’m aware of,” Rosenthal replied.