Will the Exxon Mobil Probe Improve Climate Risk Disclosure?

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Eric Orts and Tracy Hester on the Exxon Mobil Probe

The New York Attorney General’s investigations into Exxon Mobil are likely to result in a settlement where the company and others in the energy industry agree to make fuller disclosures of climate-change risks, according to experts. The Attorney General’s office has begun a probe to see if the company lied to the public or investors about the risks of climate change and how they might hurt its fortunes, according to a New York Times report last week.

The investigation will trace events back to the 1970s to see if Exxon Mobil financed scientific studies to suppress the risks of climate change. It would also examine if the company informed its shareholders adequately about how its profits could suffer as fossil fuels are replaced by alternative fuels. Exxon Mobil has rejected allegations that it suppressed climate change research, adding that it has consistently disclosed information about the business risks of climate change.

“What’s at issue [is if] there was an intentional effort to sponsor false science,” said Eric W. Orts, Wharton professor of legal studies and business ethics. Exxon internally “knew very well” what was happening in that area, but the defense it might take is that it was actually supporting research that advanced climate science, he added. Orts is also faculty director of Wharton’s Initiative for Global Environmental Leadership and author of the 2013 book Business Persons: A Legal Theory of the Firm.

Exxon is facing a basic conflict between what [it was] discussing inside corporate suites and what [it] supported outside of the company Twitter ,” said Tracy Hester, a professor of environmental law and emerging technologies at the University of Houston Law Center. “There seems to be a deep conflict that developed between what they were planning and making capital decisions on internally, and what they were advocating as uncertain science outside.”

“What’s at issue [is if] there was an intentional effort to sponsor false science.” –Eric W. Orts

Orts and Hester discussed the possible outcomes of the investigation into Exxon Mobil on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

Focus on Lobbying

Orts expected the investigations to focus on the actions taken by oil companies in the past, especially in lobbying. He noted that companies could legitimately support candidates who may prefer a certain approach to climate change. However, such approaches are significant where one political party (the Republicans) in the U.S. is in “denial entirely on climate science,” he said. It raises a broader question on the lobbying efforts of Big Oil and coal companies, and if they are being spent on trying to affect the political process in the U.S., he added.

Hester and Orts noted that Exxon Mobil and most other energy companies have changed their positions over time to support renewable energy and a carbon tax to curb emissions. However, Hester pointed out that the energy forecasts of Exxon Mobil, Shell and BP “have a world view that sees the world continuing to rely on fossil fuels into the indefinite future.”

Conflicting Positions

Hester saw an inherent bias in that approach of energy companies batting for fossil fuels. “That perspective can color what lobbying and contributions and other types of participation in groups they are going to do,” he said. “It may not necessarily be nefarious in any way,” but it does indicate that they will advocate legislative strategies that assure a future role for fossil fuels, he added. “Their lobbying efforts … to a certain extent do undercut … their efforts to expand in other types of renewable energy areas.”

As long as their business is in fossil fuels, there will be efforts to ensure that they don’t become unprofitable,” Orts noted. “At the same time, the majors have made significant investments in alternative fuels.” He pointed out that Exxon Mobil is making major investments in natural gas as a transitional fuel from fossil fuels. “They may be overestimating our continuing reliance on fossil fuels, but it is true that we are going to be relying on fossil fuels for some time to come,” he said. “The transition is very difficult to make directly to alternative fuels.”

Comparisons with Big Tobacco

Regarding the investigation into Exxon Mobil’s actions, Orts noted that comparisons are being drawn to claims made in earlier years against Big Tobacco. “[Tobacco companies] internally knew that smoking tobacco caused cancer and heart disease, but intentionally tried to mislead the public about the science,” he said. “The same question is coming up here: Did Exxon know that climate change is happening, but then intentionally tried to mislead the public and its investors on that question?”

Hester pointed out a difference that he thought might be legally important. He said that while the tobacco industry conducted research that clearly drew links between nicotine and addiction and harm from smoking, it “intentionally took every possible step to keep it secret.” He did not see in the Exxon Mobil case “an orchestrated campaign of secrecy that is behind the cloak of attorney-client privilege the way the tobacco industry was set up.”

“Exxon is facing a basic conflict between what [it was] discussing inside corporate suites and what [it] supported outside of the company.” –Tracy Hester

A Spreading Dragnet

The investigations into Exxon Mobil could extend to other oil companies, according to both Orts and Hester. For now, Exxon Mobil faces a challenging time as the investigations get underway. “The New York Attorney General’s office has often been a leader in finding and prosecuting new violations or new kinds of fraud such as securities fraud,” said Orts.

The Martin Act, a New York state law under which the New York AG is acting in this case, gives “enormous power,” noted Hester, adding that it allows the AG to issue subpoenas even without a lawsuit in cases of alleged fraud related to the sale of securities within the state. The AG’s office used the Martin Act to go after other energy companies like Peabody Coal in 2007 and 2008 for securities statements related to climate change or coal-fired plants, he added. “The AG has been at this nexus for quite a while.”

Issues at Stake

It isn’t clear how strong a case could be made for Exxon Mobil investors claiming they were misled by climate-change statements from the company. “It is hard to say that if you are investor investing in an oil company, that somehow you are being misled about climate change,” said Orts. “The contrary view would be [that it is] obvious, so who would really believe this misinformation?” Instead of winning damages, the AG’s office may be “looking to make a statement here, and it is not going to balloon into a tobacco-sized liability,” he added.

The Exxon Mobil investigation appears to be fairly broad in its scope, said Hester. He saw two types of liability in question here. One is the liability associated with making false and misleading statements to the public and how that might affect share prices. An outcome from that could be efforts to force fuller disclosure from the companies involved. “If one energy company makes that decision, it makes it harder for the other energy companies to resist making similar types of disclosures.”

The second type of liability has to do with the provisions of the 1970 Racketeer Influenced and Corrupt Organizations Act, or RICO, said Hester. That act allows prosecutions and damages actions for activities that involve federal offense which include wire fraud, he added. The case could go beyond RICO to include civil conspiracy charges, “which echo a lot of the issues that come up with RICO and securities disclosures,” said Hester. In cases involving civil conspiracy charges, judges have the power to force production of information even if it is privileged, if attorney-client communications were made as part of that conspiracy, he added.

“Overall, the objective is that government officials want companies to tell the truth.” –Eric W. Orts

Orts wondered if it made sense to assess damages for investors based on past actions of Exxon, especially since it has since corrected its position. “Exxon seems to have stopped funding certain studies three years ago, or maybe longer, and there has been a complete policy change,” he said. “Exxon is not in the camp of denying climate change science now.” He noted that the company is now advocating a carbon tax. Slapping damages on Exxon now would have the effect of asking today’s shareholders to pay previous shareholders, he added.

Likely Outcomes

Hester predicted that the investigation will result in a settlement. Such a settlement will require Exxon to make a fuller and more aggressive disclosure of its climate liability and climate risk to its investors, and to more fully embrace the results of energy modeling made by other governmental agencies, he said. “[It would] also expressly say that Exxon in no way admits that it made any kind of misstatement,” he added, noting that earlier cases have been resolved with such settlements.

“Overall, the objective is that government officials want companies to tell the truth,” said Orts. It would be wrong for energy companies to suppress the science that goes against their interests, support politicians who toe their line or hire scientists “to come up with other solutions to complicate and muddy the waters,” he added.

Orts pictured the ideal outcome, even if Exxon does not admit that it did anything wrong. “Ideally you would say yes, I am sorry I did that, we made a mistake, we shouldn’t have done that. But going forward, we promise we’re not going to do that,” he said.

 

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