In late 2013, ExxonMobil faced increasing pressure from investors to disclose more about the risks the company faced as governments began limiting greenhouse gas emissions. Of the many costs climate change will impose, oil companies face a particularly acute one: the demand for their product will have to shrink.
For years, Exxon had been using something called a proxy cost of carbon to estimate what stricter climate policies might mean for its bottom line. But as pressure from shareholders grew, a problem came sharply into focus: An internal presentation warned top executives that the way the company had been applying this proxy cost was potentially misleading. That’s because Exxon didn’t have one projected cost of carbon. It had two.
The contents of that presentation are at the heart of a trial set to start next week in a civil case brought against the company by the New York attorney general. Exxon is accused of disclosing one set of these projected carbon costs to investors while planners used an entirely different set internally for evaluating investments. The public set was more conservative and projected that climate policies would be more stringent, while the internal one assumed more modest attempts to limit emissions. The effect of using these dueling estimates, the attorney general says, was that Exxon hid tens of billions of dollars in potential costs, downplaying the risk to investors and inflating the company’s value.
If the company is found guilty of defrauding stockholders, the penalties it faces could be substantial. Exxon’s stock is among the most widely held in the country, nestled in pension funds, 401Ks and IRAs.
While Exxon has denied any wrongdoing, it does not dispute the core fact of the case: that for years it disclosed a public proxy cost that was higher than what it applied to its investment decisions. Its lawyers have argued these different sets of figures did not mislead investors and had distinct and legitimate purposes. But this only highlights another side of the case.
The energy Exxon produces today is more polluting, according to the attorney general’s complaint, because the company took the potential costs of climate change less seriously than it represented to investors.
Applying a lower estimate for carbon costs made high-polluting projects look more financially attractive, and it undermined the investment case for any project that would reduce emissions. Nowhere is this clearer than in Exxon’s tremendous investments in Canada’s oil sands, a vast expanse of low-grade hydrocarbons that now make up about 30 percent of the company’s oil reserves. [Continue reading…]