Will ExxonMobil's (XOM) Efforts to Slow Climate Change Work?

ExxonMobil Corporation XOM has been accused by New York-based prosecutor, Attorney General Eric Schneiderman, for deceiving investors in relation to climate change risks. These accusations indicated at a fraud and the company was asked to present more documents.

Schneiderman’s filing followed a day after President Trump announced plans to pull out of the Paris climate accord. Per the accord, about 200 countries vowed to reduce greenhouse gas emissions to slow global warming. The President’s decision was condemned by several world leaders and many U.S. executives.

How Investors Were Mislead

Eric Schneiderman is believed to hold evidence against ExxonMobil that can prove that the company had been presenting false and misleading statements. This could have led investors to think that ExxonMobil had accurately evaluated the risks. However, the company is likely to have overlooked a formula to estimate the impact of future environmental regulation on new deals.

In his filings, Schneiderman focused on the method used by ExxonMobil to present investors with estimates of the regulatory cost of greenhouse gas emissions on new projects. The company often presented a number it called a “proxy cost” for greenhouse gases. Through this, the company tried to account for prospective changes to government policy that will make the production and consumption of fossil fuels more costly.

Per Schneiderman, this whole accounting may be a fraud as the company might not have used it when calculating profits and losses on investments. This can again be verified by examining ExxonMobil’s documents of oil sands project, which indicates profit over the course of the project’s original timeline. The case would have been separate, if ExxonMobil applied the proxy cost it promised to shareholders. Per the attorney general, at least one significant oil sand project might have projected a financial loss.

Along with Schneiderman’s reports, ExxonMobil’s climate-related statements to investors are also being examined by the U.S. Securities and Exchange Commission on how it values its oil and gas reserves amid low prices as well as potential restrain on carbon emissions.

However, the company has denied such allegations and stated that its external statements have correctly presented the use of a proxy cost of carbon. Also, the documents forwarded to the attorney general make this fact apparent. The company will present more documents to support court filings.

Transparency Issue

Recently, ExxonMobil has been actively involved in implementing climate change policies, thanks to tremendous pressure from investors and environmentalists. The primary objectives include the restriction of greenhouse gas emissions, reduction in global warming, appointment of a climate expert on the board, reports on fracking activities and climate change impact assessments.

As a result, the company has increased climate-related disclosures. These disclosures include affirmation of the company’s pledge to the Paris climate agreement, inclusion of an environmental expert to its board and the reduction of emission from its operations. However, ExxonMobil is avoiding shareholders’ request for additional information regarding the impact of climate change in its operations.

However, the company has been struggling with Schneiderman’s requests for information about its climate change policies in state and federal court. ExxonMobil argues that it is not liable to produce records because the New York-based prosecutor’s probe is politically provoked and is an insult.

The opposition by ExxonMobil has led to a strange situation. Usually, State and federal prosecutors only disclose their findings once they have concluded the process and are ready to file charges.

ExxonMobil sued Schneiderman and Massachusetts Attorney General Maura Healey, who is also questioning the company in federal court. Moreover, the company’s effort to challenge Schneiderman’s subpoenas has led the prosecutor to forward the proofs to fight his case on why ExxonMobil should be forced to provide more documents.

As part of the inquiry, ExxonMobil has already submitted 2 million documents. These documents have revealed that Rex Tillerson, who until December was chief executive of ExxonMobil, used a separate email address under a different name — Wayne Tracker — to talk about climate change-related issues while at the company.

Schneiderman is searching more documents, that haven’t been forwarded by ExxonMobil. He is trying to interrogate employees who might know about the company’s internal climate change plans.
 
How ExxonMobil Plans to Fight Climate Change

ExxonMobil has launched a plan to slash methane emissions from its onshore assets in the United States. The company plans to replace old equipments with updated technology. It has already invested about $8 billion on energy efficiency and low-emission technologies such as carbon capture and next-generation biofuels.

ExxonMobil will focus on employee training to reduce emissions. The company plans to study the use of satellites, drones and other relevant equipment in controlling future leakages. The company's ally, National Oceanic and Atmospheric Administration, may help with drones for detecting methane.

Other Lawsuits Filed on Climate Change Issues

In September 2017, two major Californian cities — San Francisco and Oakland — filed lawsuits against five oil and energy super majors. The cities had taken legal action against Chevron Corp. CVX , ConocoPhillips COP , Royal Dutch Shell plc RDS.A , ExxonMobil and BP plc  — all Zacks Rank #3 (Hold) companies. All the stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

ExxonMobil’s case is among several, which include lawsuits by shareholders and employees, centered on whether it has for decades misled people about climate change. This includes the impact of climate change on energy prices and the environment as well as the company’s ability to develop reserves.

Notably, many such lawsuits have been filed in the past which did not bear results. In 2009, Kivalina, AK, filed charges against many oil companies which got dismissed in the court and repealed by the Clean Air Act and the Environmental Protection Agency.

In 2011, the Supreme Court of U.S. overruled the public nuisance claims of eight states and the New York City against electric utility companies. In July 2017, similar litigation cases were filed by two coastal counties of California — Marin and San Mateo — against oil majors like Chevron, BP, Shell and ExxonMobil among others for rising sea levels. The charges claimed that the companies were responsible for emitting about 20% of greenhouse gases between 1965 and 2015.

The verdict is pending and there are chances that this case might fail given the complex nature of legal requirements.

Bottom Line

Of late, ExxonMobil’s argument was dismissed by the U.S. District Judge Valerie Caproni in Manhattan as “implausible”. Also, Schneiderman and Healey were said to be pursuing politically motivated as well as fraud investigations with the intention of breaching its constitutional rights. Even the Massachusetts Supreme Court rejected ExxonMobil’s appeal to block the state’s attorney general from obtaining records to examine whether the company had hidden its knowledge of the role of fossil fuels in climate change for decades.

Caproni discharged the lawsuit with prejudice, meaning the Irving, Texas-based company cannot bring it again.

This is a major turning point, which is likely to result in ExxonMobil being prosecuted for misleading investors. Moreover, the documents produced by the company and evidences shown by Schneiderman are against the company.

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