***Update (5/31/17 2:15 pm ET). Against the backdrop of the AGs’ investigation, Exxon’s shareholders approved a resolution requiring that the company report on the impacts of climate change to its business moving forward. The probe into whether the company adequately disclosed this information in the past will likely continue in an effort to determine if Exxon should be penalized for any wrongdoing that might have resulted in lower share prices for investors.
ExxonMobil’s new CEO Darren Woods will hold his first annual meeting with shareholders on Wednesday, and climate change will be on the agenda. That’s not new for Exxon, which—like many other international oil majors—has grown accustomed to hearing calls from activist shareholders to reduce its carbon emissions and acknowledge climate risk. Yet, there is a unique element this time around: the meeting comes in the midst of an investigation by the New York and Massachusetts Attorneys General over whether Exxon fully disclosed to investors what it knew about the impacts of climate change.
Exxon’s role in—and understanding of—climate science has received a fair amount of public attention, including an environmentalist campaign aimed at demonstrating that Exxon knew about climate risks for decades. However, the implications of the legal case are actually far more expansive in scope than a simple examination of what Exxon knew or didn’t know, and when. On a broader level, it is a fairly significant test of the ability of states attorney generals to hold corporations accountable for their actions related to climate, with far-reaching consequences for the United States and global energy system.
If you haven’t been following the case, here’s a recap.
New York’s Martin Act—a law similar to, but in some ways more stringent than, federal securities laws—authorizes the New York Attorney General to investigate companies thought to be defrauding investors. Under this authority, in 2013 New York AG Eric Schneiderman launched an investigation of Peabody Energy—then the largest publicly-traded coal company in the world—into whether the company made false statements to shareholders about the financial and regulatory risks posed by climate change. The eventual settlement between AG Schneiderman and Peabody led to more robust public disclosures.
Two years later, a series of investigative reports questioned whether Exxon fully disclosed the risks to its business posed by climate change. Under his broad Martin Act authority, AG Schneiderman issued a subpoena to Exxon in late 2015, seeking documents or information relevant to this possible deceptive conduct. His Massachusetts counterpart, AG Maura Healey, launched a similar investigation a few months later.
In response, Exxon produced more than 1 million pages of internal documents before ultimately halting further responses. Last July, Texas Representative Lamar Smith, chair of the U.S. House Committee on Science, Space, and Technology, followed up by issuing his own subpoenas to the Attorneys General, demanding the production of documents related to their investigation. Smith claimed he was trying to determine whether the AGs were seeking to “stifle scientific discourse, intimidate private entitles and individuals, and deprive them of their First Amendment Rights.”
The AGs are not complying with Smith’s subpoena, saying that in this case Congress has no authority to proscribe the conduct of state law-enforcement officials. And, although Exxon has challenged the AG’s subpoenas, last week a New York appeals court upheld an earlier state court decision requiring Exxon to turn over the documents. Exxon says it is considering next steps, which may mean appealing the decision.
Who is on the right side of the law?
Exxon argues that the AGs are infringing on its First Amendment right to free speech and that they are engaging in a “fishing expedition” that violates the company’s Fourth Amendment protection against unreasonable government searches. Yet, any law student would tell you: “it is well settled that the First Amendment does not protect fraud”—which is part of the investigation. And, the AGs’ subpoena is far from an unreasonable way to collect factual evidence and to assess whether a law was violated.
The company also insists that its more than 40 years of experience and research related to climate change are “well within the mainstream of thought on the issue” and that there is no law forcing them to predict how climate change would impact the economic viability of its oil reserves. But, we now know that Exxon did analyze its future exploration in the arctic due to ice melt and the need to raise oil platforms given rising sea levels.
This leads one to believe that the investors have a point—there is evidence showing that Exxon seems to have known about the substantial effects of climate change on its business and may not have presented those risks fairly and fully when it made its financial statements. Investors then used the company’s financial statements to make decisions about buying or holding Exxon stock, and some investors have argued that the company’s stock price decreased by 13% after different news sources disclosed that “federal regulators were actively scrutinizing Exxon’s reserve accounting related to climate change and global warming and [the company’s] refusal to write down any of its oil and gas reserves in the face of declining global oil prices.”
The facts, however, are not all out. And, they won’t be until Exxon complies with the subpoenas. But, this we know: Corporations have a legal obligation to share information with shareholders that may materially affect the value of the corporation. This legal obligation is a cornerstone of America’s financial markets, which depend on information being shared so people can make informed decisions.
We also know: Regulators and enforcers like AGs Schneiderman and Healey have an obligation, and the expressed power, to ensure that companies cannot mislead our markets by making misstatements or withholding information they are legally required to disclose honestly.
If the state AGs lose, it will be a blow to states’ rights during a time of sweeping environmental roll-backs at the federal level. If they win, investor-owned companies will need to disclose more information about climate change risks to their businesses. This in turn will allow investors to make more informed decisions about the correct value of these companies, and it will allow the market to take account of climate issues more accurately.
A victory will also be a testament to the power states have on yet another front to drive efforts to combat climate change. And, that could encourage more states to take action.
***Special thanks to Dylan Cowart who assisted me with this article.