Exxon’s Climate-Change Accounting Goes on Trial

Source: By Corinne Ramey, Wall Street Journal • Posted: Monday, October 21, 2019

New York’s attorney general says the oil giant misled investors about its calculations of future climate-change regulation

A win for Exxon would represent another blow for climate-change lawsuits. An Exxon Mobil oil refinery plant in Baton Rouge, La. Photo: Julie Dermansky/Reveal from The Center for Investigative Reporting/Associated Press

Exxon Mobil Corp. and New York’s attorney general are headed for a showdown this week over accusations the company deceived investors, a rare trial over how the oil industry accounts for the impact of climate change.

The trial, which begins Tuesday in state court in Manhattan, is the culmination of a sprawling investigation into Exxon and its accounting practices that spanned four years and three New York attorneys general. It is expected to include as a witness former Secretary of State Rex Tillerson, who was Exxon’s chief executive from 2006 to 2016.

The attorney general’s office said the company told investors that it was taking into account the future costs of regulations it expected governments to adopt in response to climate change. But Exxon’s internal calculations didn’t match its public representations, the office said.

The attorney general’s office said the company’s misrepresentations caused investors to overvalue its stock. It estimated the damage to shareholders to be between $476 million and $1.6 billion.

“Exxon in effect erected a Potemkin village to create the illusion that it had fully considered the risks of future climate-change regulation,” the complaint says.

Exxon has denied wrongdoing and said a reasonable investor wouldn’t expect to know such internal details. The company has also accused the attorneys general involved, all Democrats, of being motivated by politics in bringing the case, which the office has denied.

The oil industry has said that it is difficult to estimate the future costs of climate-change regulation, which is uncertain politically and varies across national boundaries, as investors have demanded more information.

The trial is being watched closely, said Jennifer Rowland, an analyst at financial-services firm Edward Jones.

A verdict in the attorney general’s favor could damage Exxon’s reputation and bolster federal lawsuits filed by shareholders in Texas and New Jersey that make similar allegations, which Exxon has also denied. It could also spur future investigations.

“It could open up a big can of worms,” Ms. Rowland said. “Other companies could be looked at and questioned about what assumptions they have made.”

A win for Exxon could insulate the company from similar suits and would represent another blow for climate-change lawsuits. Federal judges have tossed other climate-change cases, including when New York, San Francisco and other cities sued oil companies in the past several years to recoup costs incurred from the effects of rising global temperatures.

Tuesday’s proceedings mark only the second trial of a case where climate change is a central issue in U.S. history, said Michael Gerrard, director of Columbia Law School’s Sabin Center for Climate Change Law. In the first, he said, a federal judge in 2007 upheld a Vermont regulation on emissions standards that had been challenged by auto makers and dealers.

The New York attorney general’s office sued Exxon last October, saying its climate-change disclosure methods were “sanctioned at the highest levels of the company.”

Prosecutors said Mr. Tillerson was aware of misrepresentations to investors. They said the then-chief executive used a different email address, with the alias Wayne Tracker, for internal correspondence about these matters.

A spokeswoman for Mr. Tillerson referred a request for comment to Exxon. An Exxon spokesman didn’t respond to a request for comment.

In a deposition, Mr. Tillerson said he used the Wayne Tracker address because of the heavy volume of email going to the account that used his real name. He also referred to differing calculations as an “academic debate.”

Newsletter Sign-up

Central to the trial is the calculation of proxy costs, or formulas the company used to calculate the risk of future regulation. Such disclosures were important to investors because they spoke to the company’s financial health, the attorney general’s office said.

The differences were sometimes stark. In oil-sands projects in Alberta, Canada, Exxon understated the costs of future government regulation by $25 billion, the office said.

Exxon has said regulation in Alberta “has been and remains in flux, with rival political factions enacting and repealing climate regulations regularly.”

Exxon says reasonable investors understood it weighed climate risks while not disclosing proprietary details. It had different ways of calculating regulation risks and applied them in appropriate contexts, its lawyers wrote.

The case is divisive partly because it relies on the Martin Act, a broad New York state law that has been employed to pursue Wall Street fraud.

“This is an abuse of the Martin Act,” said Tom Stebbins, executive director of the Lawsuit Reform Alliance of New York, which fights what it views as excessive litigation. “By all indications, this is a lawsuit to carry out a political agenda.”

Bernie Nash, co-head of the state attorneys general practice at firm Cozen O’Connor P.C., said the case was an atypical use of the Martin Act. In the past, the courts have allowed for broad uses of the Martin Act, he said.

“Philosophically, no statute is limitless and you don’t know when you’ve exceeded it until the court says so,” Mr. Nash said.