May 25, 2017 Articles

Villainy: The ExxonMobil Story

How does one create a compelling storyline to galvanize the masses? To change behavior? Why, create a villain.

By Jane E. Montgomery – May 25, 2017

How does one create a compelling story line to galvanize the masses? To change behavior? Why, create a villain.

Frustrated by the slow pace of the federal government in addressing climate change, climate activists took a page from the tobacco playbook and created a villain to bring attention to the issue of noncompliance with disclosure laws relating to climate risks and opportunities. 

The Playbook: Creating a Villain
Nongovernmental organizations (NGOs) have often tried to pressure policy makers by demonizing an industry. But the culpability for climate change is as elusive as it is pervasive, so much so that finding a policy that attracts sufficient passion to force regulators or legislators to act has proved difficult and slow. Show members of Congress black smoke emanating from a manufacturing facility, and they might act. Tell them the planet is getting too hot too quickly, and their response is likely, “Prove it.”

In 2012, a group of NGOs and academics met in San Diego to discuss how to engage the public in climate change policy. One lesson from the workshop was to search for company documents that showed “knowledge” or “laundering” of climate change science. Another lesson was to use those documents to create a villain. The NGOs pursued both of these goals through press coverage.

Following the playbook, the Energy and Environmental Reporting Project at Columbia University, InsideClimate News, and the Los Angeles Times researched archives and public records and found their villain: ExxonMobil (Exxon). In a 2015 three-part story, the Los Angeles Times story pieced together, using Exxon’s own documents, a case of alleged misrepresentation. The authors described how researchers at Exxon toiled through difficult data collection in the Arctic, participated in the early development of climate models, and came to the conclusion that fossil fuel emissions were likely already causing a warming climate and that the climate would warm dramatically over the years. Sara Jerving et al., “What Exxon Knew About the Earth’s Melting Arctic,” L.A. Times (Oct. 9, 2015). But Exxon reportedly feared the repercussions of these conclusions on its carbon-intensive petroleum business and, according to the articles, set out to mislead the public by emphasizing the uncertainty associated with the complex climate models used by the researchers. ‘“What is most unfortunate,’ . . . ‘is that polarization around climate change . . . was manufactured by those whose financial and political interests were most threatened.’ Even today . . . that polarization has crippled any hopes for bipartisan policy solutions.” Amy Lieberman & Susanne Rust, “Big Oil Braced for Global Warming While It Fought Regulations,” L.A. Times (Dec. 31, 2015) (quoting Justin Farrell, Yale sociologist). Furthermore, according to the articles, Exxon relied on the research for its internal plans to drill in the Arctic, make its facilities resilient to climate change, and reap the financial benefits of its superior knowledge.

The NGOs Ignite Regulators
The Exxon story ignited strong emotions and reactions from diverse corners of regulatory, enforcement, and public opinion arenas. Understanding the developments is instructive for other fossil fuel companies that may find themselves in the crosshairs of the NGOs and states.

Shortly after the articles were published, New York Attorney General Eric Schneiderman subpoenaed Exxon for a treasure trove of documents dating back to 1977. The document subpoena requested research, construction planning and oil exploration, communications, financial plans, and consumer information covering nearly every aspect of Exxon’s knowledge of and actions about climate change.

Since November 2015, other investigations have been opened, most notably in Massachusetts and the territory of Puerto Rico. In addition, the U.S. Securities and Exchange Commission (SEC) has reportedly opened an investigation, and the states participating in the climate coalition reportedly have ongoing investigations.

Even Exxon’s own shareholders have joined the attack. Exxon restated the value of its oil and gas reserves, reducing them by 20 percent in September and again in December 2016, some say in response to the investigations. A shareholder derivative action was filed in November, alleging that the loss in share value between February and October 2016 was directly due to Exxon’s failure to disclose pertinent information in its SEC filings. That action was followed by a similar action from Exxon retirees.

NGOs want to know if Exxon’s major refineries and storage facilities are safe from storms, fearing major oil spills. They have filed or amended actions against Exxon for failure to take into account climate change impacts in environmental permits at facilities in Massachusetts, Texas, and other locales.

A conference of attorneys general in 2016 focused its efforts on identifying “creative ways to enforce laws being flouted by the fossil fuel industry and their allies in their shortsighted efforts to put profits above the interests of the American people and the integrity of our financial markets,” according to Schneiderman.

Congress has weighed in, with the Senate holding two committee inquiries into purported bad faith or prejudgment of Exxon by the state attorneys general. And the state attorneys general have objected to and refused to comply with congressional subpoenas, citing independent prosecutorial discretion to pursue wrongdoing as they see fit.

Exxon has fought back vigorously. Exxon filed a lawsuit in Texas against the Massachusetts and New York attorneys general, attempting to quash the investigation. In the last several months, the attorneys general have been ordered to give depositions regarding the purpose of the investigations, but then the requests were suddenly dropped. On March 29, Judge Kinkeade issued an order transferring venue to New York, but, in a robust order, noted that Exxon’s claims of improper motivations for the state investigations “should be considered.” Exxon v. Schneiderman & Healey, 4:16-cv-00469 (N.D. Tex. 2017). Although Exxon continues to respond to the subpoenas, it has initiated an outreach campaign to ensure that its side of the story is properly reported.

Climate Change Disclosure Requirements
In February 2010, the SEC issued guidance about climate change disclosure. In Commission Guidance Regarding Disclosure Related to Climate Change (2010 Climate Guidance), the SEC noted that, since the 1970s, disclosure of material information relative to compliance with environmental laws has been required. 75 Fed. Reg. 6290, 6292 (Feb. 8, 2010) (referencing Release No. 33-6383, 47 Fed. Reg. 11380 (Mar. 3, 1982)). Further, the SEC noted that climate change issues had become significant across international markets. Thus, climate-related disclosures were the type of “material” information that, in light of the circumstances, were necessary to avoid misleading financial statements. Id. at 6293.

In response to questions about how to address climate issues, the SEC noted that the following specific climate-related information would “enhance” registrants’ disclosures: (A) the impact of specific climate or greenhouse gas–related legislation or regulation, (B) the impact of international accords, (C) the indirect consequences of regulation or business trends, and (D) the physical impacts of climate change. Id. at 6294–97. Each of these topics is targeted by the New York attorney general subpoena.

If a state’s investigation shows that disclosures have been misleading or intentionally fraudulent, the states may bring actions for fraud. Fraudulent statements are actionable by private parties (states would act as citizens under the federal securities laws) under section 10(b) of the Securities Exchange Act of 1934 when a person could have, or should have, discovered with reasonable diligence the facts constituting the fraud. The Sarbanes-Oxley Act of 2002 provides that a private action claiming fraud under section 10(b) of the Exchange Act (and Rule 10b-5 promulgated thereunder) must be brought “not later than the earlier of—(1) 2 years after the discovery of the facts constituting the violation; or (2) 5 years after such violation.” 28 U.S.C. § 1658(b) (2015); see also Merck & Co. v. Reynolds, 559 U.S. 663 (2010). Further, New York’s Martin Act of 1917 gives the state significant power over securities matters. N.Y. Gen. Bus. Law §§ 352-c, 353.

Legal Consequences
So, what charges, if any, might Exxon face?

A key question in the various investigations will be whether the elements of fraud exist. If the most that can be said is that Exxon should have been more forthright about climate change sooner, a fraud investigation seems anticlimactic. But if the fraud on the market is so buried that no one could have foreseen it until the Los Angeles Times articles brought it to light, the implications of the investigations become more serious.

Exxon, by nearly any measure, is one of the 10 largest companies in the world. Because of this, its accounting threshold for “material” information is correspondingly high; and, even if Exxon has been reporting financial risks and benefits, the nonfinancial issues (the impact to business plans and facility readiness, for example) were likely not addressed before the 2010 Climate Guidance. However, based on the SEC’s own statements, the 2010 Climate Guidance did not create new disclosure obligations; the obligations have existed since at least 1982. Although Exxon may be able to show that it reasonably expected that climate change would not have a material impact that needed to be disclosed, the ultimate position taken by the SEC in its investigation will certainly change the face of public company disclosures related to climate issues.

Prejudgment? And, in the Eyes of the Public, Does It Matter?
But back to villainy. The Los Angeles Times articles pointedly judge—and perhaps cause the reader to prejudge—Exxon’s actions, as demonstrated in the documents they reviewed, in light of the SEC disclosure obligations.

The articles note that Exxon’s board of directors

  • authorized media campaigns to emphasize the uncertainty surrounding climate change research,
  • stated that the research was “too murky to warrant action,” and
  • authorized media campaigns and “denier” research to forestall international or federal regulation of fossil fuels.

The articles further note that Arctic exploration expanded because Exxon’s climate research showed that it would be easier and cheaper to explore in a warming Arctic. Exxon piloted Arctic drilling techniques, built Far North shipping centers, raised the level of drilling platforms to withstand higher sea levels and wave action, and purchased reserve interests.

In short, so say the articles, Exxon did not disclose material risks and benefits of climate change known to Exxon and not to the general public, thus denying reasonable investors information material to their investment decisions.

NGOs have jumped onto the bandwagon, repeating the charges made in the Los Angeles Times articles and increasing the calls for more specific disclosure of climate-related risks and benefits. Some independently review past disclosures, while others just repeat the authors’ allegations. Several examples include the following:

  • Sierra Club: “Judged by its business model alone—spending billions of dollars a year on locating new oil and gas reserves, even as scientists tell us we must stop burning the stuff—Exxon is a threat to the public good. Just as disturbing is the company’s record of fueling climate change disinformation. Even though its own internal researchers had confirmed humans’ role in global warming as early as the 1970s, for decades the company fought any attempts to curtail greenhouse gases while funding climate science denial. Those lost years are now speeding us closer to climate change disaster.” Jason Mark, The United States of ExxonMobil, Sierra (Dec. 13, 2016).
  • DeSmogBlog Project: “[T]he latest disclosures on donations by ExxonMobil, reported publicly here for the first time, show it continues to support organizations that claim greenhouse gases are not causing climate change, or that cuts to emissions are a waste of time and money.” Graham Readfearn, ExxonMobil: New Disclosures Show Oil Giant Still Funding Climate Science Denial Groups, DeSmogBlog (July 8, 2016).
  • Positive+Investment: “Financially, we are concerned that Exxon Mobil and Chevron are exposing shareholders to significant climate risk and, perhaps even more importantly, climate-related systemic risk. Ethically, we are concerned about corporate lobbying, burying climate science, and investing in ‘unburnable’ reserves—all spuriously justified as being in the interest of shareholder value.” Open Letter to Major Shareholders and Voting Advisory Firms, Positive+Investment (May 25, 2016).

Valuable research is conducted by industry all of the time, research that might not ever be completed without public company contributions. Moreover, the implications of research are frequently not known at the time papers are published. Public companies use research to improve products and the means of producing them. Will cases like this one cause companies to back away from research? Is the public served by these statements that appear to prejudge the outcome of the states’ investigations?

And if the NGO goal is simply to create a villain that will galvanize Congress and the president to address climate change, will the outcome of the investigations even matter?

While Exxon pushes forward with a vigorous defense, new reports, articles, and allegations continue to spring forth. As orchestrated by the playbook, the company’s own documents are being used to create the allegations of nondisclosure.

Importantly, Exxon is not the only company to engage in research and to hold substantial company archives in public libraries. Tactics similar to those used against Exxon may well become more and more commonplace over the coming years, and companies are advised to consider the implications of research programs and how their findings may need to be addressed in financial disclosures. Certainly, as public company annual meeting time comes into view, shareholder requests for more robust climate disclosure are likely to be loud this year, and the fossil fuel industry must take care to adhere to the 2010 SEC Climate Guidance.

After all, there is room on the front pages for more than one villain.

Jane E. Montgomery is a partner at Schiff Hardin LLP in Chicago, Illinois.

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