Written by Michael Theroux, John Piasta, Laura Gill and Ryan Moore
More than four years of contentious litigation concluded this month when the Supreme Court of the State of New York released its judgment in the People of the State of New York v Exxon Mobil Corporation. The Court found overwhelmingly against the Attorney General of New York (the "Attorney General"), exonerating ExxonMobil Corporation ("Exxon") from allegations that it engaged in "a long-standing fraudulent scheme" to defraud investors over management of business risks posed by climate change regulation.
The lawsuit arose from two 2014 Exxon publications titled "Energy and Carbon – Managing the Risks" and "Energy and Climate". The Attorney General alleged that Exxon misled investors by representing that a "proxy cost" of carbon was universally used to evaluate the effect of environmental regulation on energy projects, when in fact Exxon used a different variable "GHG cost" for internally evaluating projects. The Attorney General alleged that Exxon's capital investments were therefore riskier than investors were led to believe, that investors made decisions based on the proxy cost, and that securities were overvalued and artificially inflated.
The Attorney General's case was based on two misrepresentation claims. First, common law misrepresentation charges, which required the Attorney General to prove Exxon's intent to deceive, reliance on the misrepresentation, and damages. Second, statutory misrepresentation under the Martin Act, which is legislation unique to New York. These charges have a lower standard of proof than common law misrepresentation and required the Attorney General to prove only that a misrepresentation occurred and that the misrepresentation was material in the sale of securities. The Attorney General did not need to prove intent, reliance, or damages.
The trial did not go well for the Attorney General. Despite a four-year investigation, the Attorney General did not lead any evidence from any investor who claimed to have been misled by any disclosure even though the Attorney General had previously stated that it would call those witnesses at trial. In its closing statement, the Attorney General withdrew the common law misrepresentation charges.
In its written decision, the Court held that the Attorney General's claims against Exxon lacked merit. The Court accepted Exxon's explanation that it used the proxy cost of carbon and GHG costs for different purposes and held that Exxon had never misrepresented that fact. In particular, Exxon used the proxy cost of carbon to create a projection applicable to its global operations of the effect of decreasing energy demand resulting from environmental policies and to forecast future oil and gas prices. On the other hand, Exxon used the GHG cost more narrowly in order to evaluate the cost of complying with jurisdiction-specific regulation on specific projects. Exxon's stock price was not impacted by the practice, as the Attorney General led no evidence to show that Exxon's proxy cost of carbon or GHG cost altered the investment decisions of any investors or analysts.
The Court used strong language to criticize the Attorney General's claims, calling the initial complaint "hyperbolic" and noting "politically motivated statements" by the former Attorney General leading up to the trial. By contrast, the Court stated that Exxon's internal policies were carried out in a professional manner and that both executives and employees were "uniformly committed to rigorously discharging their duties in the most comprehensive and meticulous manner possible". The Court noted that not a single Exxon employee was aware of any scheme to mislead investors about the way Exxon copes with climate risk.
In the result, the Court found that the Attorney General's misrepresentation allegations against Exxon lacked merit and dismissed the case with prejudice, meaning that the same issue cannot be tried again on the same facts in the State of New York. However, the legal battle is not over for Exxon, as the Attorney General of Massachusetts filed a complaint on the second day of the trial which mimics the Attorney General's claim but also alleges a "tobacco-style" disinformation campaign towards climate science.
Because there remains significant uncertainty around the likelihood, timing, effects of climate trends and events, and materiality of climate change-related risks, it is likely that climate change-related disclosure will continue to receive increased attention and scrutiny. As climate change-related risks becomes increasingly important globally, investors will search for information regarding its impact on their investments, collectively in the short, medium, and long-term. Issuers are encouraged to review their disclosure in that context and evaluate their related governance, risk assessment and disclosure processes. Where climate change-related disclosure is required under applicable securities laws, issuers should ensure such disclosure is appropriately qualified, the limitations thereon are identified, and the material factors or assumptions used to develop such disclosure are effectively communicated to investors. Although the New York case indicates that there will be significant hurdles to substantiating misrepresentation claims in court, whether tackling climate change through securities law litigation is a viable option for activists remains to be seen.