Exxon argues at its climate fraud trial that its climate risk terms were not deceptiveExxon argues in New York's climate fraud trial that it did not confuse investors with its different terms to disclose climate risks. Photo credit: Angela Weiss/AFP via Getty Images
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By Karen Savage

Exxon employees conflated terms used to calculate the risk posed to its business by climate change, according to documents and testimony heard on Monday, as the oil giant’s climate fraud trial entered its third week in New York Supreme Court. 

The difference between the two terms Exxon used to describe climate risks—”proxy cost” vs. “greenhouse gas cost”—lies at the heart of the case. Attorney general Leticia James alleges the company deceived investors by using different numbers for its internal calculations about those risks and another to share with investors and failing to disclose the difference. The AG’s office has shown the court documents it says show the company made no distinction between the numbers and used the terms interchangeably. 

Exxon has not denied using two different numbers, but maintains it has clearly disclosed how it uses them. It says its publicly shared proxy cost of carbon was used to project global energy demand, while its greenhouse gas cost was a proprietary internal number used to evaluate investment opportunities.

As evidence of its careful attention to the disclosures, Theodore V. Wells, lead attorney for Exxon, showed the court an email with edits made to its Managing the Risks report by William Colton, Exxon’s former vice president of corporate strategic planning. 

The email shows Colton made edits to the report, including changing “proxy cost” to “GHG cost.”

“We need to be more precise in how we talk about applying CO2 costs in project evaluations,” Colton wrote in an email to Robert Luettgen, secretary of Exxon’s management committee.  

Exxon has said it disclosed the numbers in its 2014 Managing the Risks and Energy and Climate reports, which were issued in exchange for the withdrawal of a shareholder proposal seeking disclosure on the way the company calculates its climate risk. 

Shareholders have testified they were misled by the reports.

Initially, the proxy cost of carbon and greenhouse gas cost had different values, but were aligned shortly after the release of the two reports. 

The AG contends that Exxon knew the pre-alignment numbers were unclear to investors, as shown in talking points circulated in May 2014 by Guy Powell, Exxon’s then-greenhouse gas manager, to other company employees.

“In recent reports released by [ExxonMobil] (Energy and Climate and Energy and Carbon Managing the Risks), we have implied that we use the [Energy Outlook] basis from proxy cost of carbon when evaluating investments,” the talking points said. 

Wells asked Colton his reaction when he heard the AG alleged the alignment of the two numbers had something to do with Exxon’s shareholder disclosures. 

“Frankly to me it didn’t even make sense,” Colton testified. He said the numbers were aligned as part of Exxon’s annual planning process and reflected the company’s thinking on the evolution of global climate regulations. 

“We wouldn’t change our business practice, we’d change the document,” Colton told the court, adding that he likely saw the slides, but did not review the talking points.  

Kevin Wallace, lead attorney for the AG, returned to the issue of conflated terms during cross-examination, pointing out that Exxon confused readers by using the terms “proxy cost,” “cost of carbon” and “proxy cost of carbon” in Managing the Risks and used the term “GHG gas proxy cost” in Energy and Climate.

Wallace asked Colton if it concerned him to see the proxy cost of carbon had been confused with the greenhouse gas cost by an Exxon employee during the writing and editing of Managing the Risks

Colton said it was likely done by someone who was “just a writer” from outside his group who was not in tune with the terms. 

“It’s not hard to imagine that someone who is not a subject matter expert” would make that error,” Colton said. 

“You and your group were subject matter experts, so is it reasonable to say the distinction would be difficult to understand for someone who is outside your group?” Wallace asked.

“It depends on how carefully they’re reading this,” Colton said. “It was our expectation that if someone would sit down and read this report that they would understand this.” 

It isn’t just company employees who have confused the terms. Richard Auter, head of Exxon’s auditing team at PricewaterhouseCoopers testified last week that he used the terms greenhouse gas cost and proxy cost interchangeably in memos written prior to 2017.

In order to prove fraud under the Martin Act, the AG must establish that potentially deceptive information provided by Exxon was false and that investors would have considered that misinformation to be important to their investment decision.

The court is closed Tuesday for election day, but the trial will continue Wednesday and Exxon is expected to wrap up its defense later in the week. Judge Barry Ostrager has said he will issue a ruling within 30 days of the trial’s conclusion. 

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