Exxon Mobil faces legal challenge over climate change reporting

Exxon Mobil is facing a US lawsuit over claims the oil giant ‘systematically and repeatedly’ defrauded investors about the financial risks the company faces from climate change regulations, by failing to reflect its agreed approach to accounting for the impact in its reporting

The lawsuit is being brought by the New York attorney general, who alleges that for years Exxon assured investors that it was accounting for the likelihood of increasingly stringent regulation of greenhouse gas emissions by rigorously and consistently applying an escalating cost of those emissions to its business planning, investment decisions, calculations of the amount and value of company reserves and resources, impairment assessments, and projections of future demand for oil and gas.

However, Exxon did not abide by these representations, and instead did much less than it claimed, deceiving investors as to the company’s true financial exposure to increasing regulations and policies adopted to mitigate the adverse effects of climate change, attorney general Barbara Underwood claimed in the lawsuit.

Underwood’s complaint alleges that Exxon told investors that it accounted for the risk of governmental regulation of climate change by applying a ‘proxy cost’ of carbon. Long-term assets remain viable, and estimations of future demand for oil and gas. However, the company frequently did not apply the proxy costs as represented in its business activities. Instead, in many cases Exxon applied much lower proxy costs or no proxy cost at all.

The complaint alleges that this fraud reached the highest levels of the company. Exxon’s management, including former chairman and CEO Rex Tillerson knew for years that the company was deviating from its public representations by using a second set of proxy costs from undisclosed internal guidance that were lower than the publicly disclosed proxy costs. Exxon’s management also knew that using these lower figures made Exxon more susceptible to climate change regulatory risk, but did not align these two sets of proxy costs for years.

The complaint alleges that the fraud continued even after Exxon increased its internal proxy cost guidance to conform to its public representations. Indeed, when the company realized that applying the publicly represented proxy costs would result in ‘massive’ costs and ‘large write-downs’, and shorter asset lives, Exxon management decided to apply an undisclosed ‘alternate methodology.’

Using this alternate methodology, Exxon chose not to apply any proxy cost and, instead, allegedly chose to assume that existing climate regulations would remain in place and unchanged, indefinitely into the future.

‘Significant’ scope

According to the allegations in the complaint, Exxon made these misrepresentations knowing that its shareholders were concerned about the company’s management of the risk of future climate change regulations, particularly given its carbon intensive assets.

Underwood claimed the impact of Exxon’s alleged fraud on the company’s value is significant in scale and scope. For 14 of Exxon’s oil sands projects in Alberta, Canada, its failure to apply its publicly represented proxy costs resulted in undercounting of projected greenhouse-gas related expenses by more than $25bn (£19.4bn) over the projected lifetime of the projects.

In addition, Exxon undercounted projected greenhouse gas-related costs by as much as 94% - equal to about $11bn - in an economic forecast for its Kearl oil sands asset in Alberta.

Underwood said: ‘Investors put their money and their trust in Exxon - which assured them of the long-term value of their shares, as the company claimed to be factoring the risk of increasing climate change regulation into its business decisions. ‘Yet as our investigation found, Exxon often did no such thing.

‘Instead, Exxon built a facade to deceive investors into believing that the company was managing the risks of climate change regulation to its business when, in fact, it was intentionally and systematically underestimating or ignoring them, contrary to its public representations.’

The lawsuit seeks an order prohibiting Exxon from continuing to misrepresent its practices in this area. The suit also asks the court to award damages, a disgorgement of all monies obtained in connection with the alleged fraud, and restitution. Additionally, the complaint requests the court to direct a comprehensive review of Exxon’s failure to apply a proxy cost consistent with its representations, and the economic and financial consequences of that failure.

An Exxon Mobil spokesman described the allegations as ‘meritless’ and the result of a ‘tainted’ investigation.

The spokesman said: ‘These baseless allegations are a product of closed-door lobbying by special interests, political opportunism and the attorney general’s inability to admit that a three-year investigation has uncovered no wrongdoing.

‘The company looks forward to refuting these claims as soon as possible and getting this meritless civil lawsuit dismissed.’

People of the state of New York, by Barbara D. Underwood, Attorney General of the State of New York against Exxon Mobil Corporation is here

Report by Pat Sweet

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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