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Nov 21, 2015

Exxon's public disclosures on climate risk in the spotlight

Schneiderman probe seen as test case for legal challenges other oil producers could face for their public stance on impact of climate risk to their business models

The run-up to the UN’s 21st Conference of the Parties on climate change, to be held in the Paris suburbs later this month, keeps getting more interesting. A few weeks ago, the US Department of Labor announced a change in guidelines that will allow private pension funds to consider environmental, social and governmental (ESG) factors when making investment decisions.

Two weeks ago there was news that New York State Attorney General Eric Schneiderman is investigating ExxonMobil for possibly misleading investors in public disclosures on the risks of climate change while being aware of those risks from the research of its own scientists as long ago as 1977. Then, on November 6, President Obama pulled the plug on the hotly debated Keystone Pipeline that would have carried oil from the tar sands of western Canada to refineries and oil distribution centers in the southwest US.

There is no lack of governance implications in any of these situations for the organizations involved. But the possibility of New York State bringing a lawsuit against ExxonMobil for financial fraud under the state’s permissive Martin Act is perhaps the most alarming. That’s not only because of the gravity of the charges and the potential reputation and long-term litigation fallout on the odds of their being proved in court, but also because getting corporate disclosures right is a central element of companies’ governance efforts.

In an October 15 post to the ExxonMobil Perspectives blog, Kenneth Cohen, the company’s vice president of public & government affairs, refutes claims by website InsideClimateNews and the Los Angeles Times that the oil company suppressed its own climate research ‘as part of a conspiracy to deny the existence of climate change’.

‘Nothing could be further from the truth,’ Cohen writes.

Under the Martin Act, the definition of financial fraud is broader in New York than in other states, where a lawsuit needs to prove there was intent on a company’s part to defraud investors – a significantly higher standard of proof. ‘A simple misrepresentation or failure to disclose something material could amount to financial fraud under this New York law,’ says Doug Park, director of legal policy and outreach at the Sustainability Accounting Standards Board who specializes in corporate governance. ‘That really frames the way the New York State attorney general is going to go about his investigation.’

ExxonMobil is on record as a long-term funder of organizations widely known for their denials of climate change, including the American Enterprise Institute (AEI) and the Heritage Foundation. Exxon gave $3,615,000 to AEI from 1998 to 2012 and $780,000 to the Heritage Foundation between 2001 and 2012.

‘What will be interesting is if the attorney general uncovers any evidence about intent by the company to either cover up its own internal research or fund climate [change] denial research,’ Park says. ‘To the extent that that evidence is found, it gives ammunition for other state attorneys general to come in and join New York State and bring their own actions under their state laws.’

Park believes that may be one of the key motivations behind Schneiderman’s subpoenaing internal documents and emails about climate risk from ExxonMobil. ‘I think that’s a significant risk for ExxonMobil in this situation because the attorney general seems to be going to a place he doesn’t need to go but that could help his counterparts in other states.’

And because proving intent to defraud is required under federal law, such evidence would be very helpful if the SEC were ever to bring a case against ExxonMobil, Park adds.

ExxonMobil isn’t the only fossil fuels producer that could be targeted if Schneiderman’s probe gains any traction. As reported in the New York Times on November 6, many oil companies have not only funded climate denial research but also ‘resisted pressure for years from environmental groups to warn investors of the risks that stricter limits on carbon emissions could have on their businesses, although that appears to be changing.’

‘This is going to be an interesting test case for how strong the [legal] argument will be against those other companies,’ says Park.

David Bogoslaw

Associate Editor and Online features producer for Corporate Secretary