NEW YORK, Oct. 24, 2018 – Attorney General Barbara D. Underwood today announced a lawsuit against Exxon Mobil Corporation (“Exxon”), alleging that the company misled investors regarding the risk that climate change regulations posed to its business. As alleged in the complaint, Exxon for years assured investors that it was accounting for the likelihood of increasingly stringent regulation of greenhouse gas emissions – which are driving climate change and which Exxon emits in large quantity – by rigorously and consistently applying an escalating cost of those emissions to its business planning, investment decisions, calculations of the amount and value of company reserves and resources, impairment assessments, and projections of future demand for oil and gas. However, Exxon did not abide by these representations, and instead did much less than it claimed, deceiving investors as to the company’s true financial exposure to increasing regulations and policies adopted to mitigate the adverse effects of climate change.

Exxon marketed the company as a secure long-term investment and courted long-term investors such as institutional shareholders, life insurance companies, and pension funds. For example, the New York State Common Retirement Fund (CRF), which is entrusted with the retirement security of over one million state employees and retirees, and the New York State Teachers Retirement System, which serves over 425,000 members, hold Exxon shares with a combined value of approximately $1.5 billion. These investors depend on companies to provide complete, accurate information about the value of their assets to make informed investment decisions. In fact, over the course of the past decade, Exxon institutional shareholders repeatedly sought more information and disclosure regarding the risk the company faced due to climate change regulations.

“Investors put their money and their trust in Exxon – which assured them of the long-term value of their shares, as the company claimed to be factoring the risk of increasing climate change regulation into its business decisions. Yet as our investigation found, Exxon often did no such thing,” Attorney General Underwood said. “Instead, Exxon built a facade to deceive investors into believing that the company was managing the risks of climate change regulation to its business when, in fact, it was intentionally and systematically underestimating or ignoring them, contrary to its public representations.”

The Attorney General’s complaint alleges that Exxon told investors that it accounted for the risk of governmental regulation of climate change by applying a “proxy cost” of carbon. A proxy cost serves as a stand-in for the likely effects of expected future events; in this case, the effects of the increasingly stringent climate change regulations that Exxon has publicly stated it expects governments throughout the world to impose and steadily increase over the course of several decades. As the complaint alleges, Exxon told its investors that it used that proxy cost in its investment decisions, corporate planning, estimations of company oil and gas reserves, evaluations of whether its long-term assets remain viable, and estimations of future demand for oil and gas.

Yet, contrary to those representations, the complaint alleges that Exxon frequently did not apply the proxy costs as represented in its business activities. Instead, in many cases Exxon applied much lower proxy costs or no proxy cost at all.

The complaint alleges that this fraud reached the highest levels of the company. Exxon’s management, including former Chairman and Chief Executive Officer (CEO) Rex W. Tillerson knew for years that the company was deviating from its public representations by using a second set of proxy costs from undisclosed internal guidance that were lower than the publicly disclosed proxy costs. Exxon’s management also knew that using these lower figures made Exxon more susceptible to climate change regulatory risk, but did not align these two sets of proxy costs for years.

The complaint alleges that the fraud continued even after Exxon increased its internal proxy cost guidance to conform to its public representations. Indeed, when the company realized that applying the publicly represented proxy costs would result in “massive” costs and “large write-downs,” and shorter asset lives, Exxon management decided to apply an undisclosed “alternate methodology.” Under this “alternate methodology,” Exxon chose not to apply any proxy cost and, instead, allegedly chose to assume that existing climate regulations would remain in place and unchanged, indefinitely into the future.

The complaint further alleges that in various other aspects of its business – including evaluating the volume of its oil and gas reserves, determining whether to write down its major assets, and estimating demand for its products in the transportation sector – Exxon chose not to apply proxy costs in the manner it represented to investors. By applying a lower proxy cost or not applying any proxy cost at all, Exxon repeatedly and consistently underestimated the potential financial risk that increasing climate change regulation posed to its assets and value.

According to the allegations in the complaint, Exxon made these misrepresentations knowing that its shareholders were concerned about the company’s management of the risk of future climate change regulations, particularly given its carbon intensive assets. Those investors included institutional investors such as New York’s CRF. In responding to shareholder requests for an explanation of how it accounted for the likelihood of increased climate change regulations, Exxon allegedly made numerous misrepresentations, including offering a misleading analysis in which it understated the financial risks that it would face in a “two degree scenario” – that is, if governments acted to limit global temperature rise to two degrees Celsius above pre-industrial levels. Exxon continued to present that analysis to investors even after being warned by the author of a study upon which it purported to rely that the analysis was “misleading.”

The impact of Exxon’s alleged fraud on the company’s value is significant in scale and scope. For example:

  • For 14 of Exxon’s oil sands projects in Alberta, Canada, Exxon’s failure to apply its publicly represented proxy costs resulted in undercounting of projected greenhouse-gas related expenses by more than $25 billion over the projected lifetime of the projects.
  • Exxon undercounted projected greenhouse gas-related costs by as much as 94% – equal to about $11 billion – in an economic forecast for its Kearl oil sands asset in Alberta.
  • Exxon failed to apply the proxy costs it represented to the public in estimating company reserves at Cold Lake, a major oil sands asset in Alberta, resulting in an overestimation of its projected economic life by 28 years, and an overestimation of company reserves volumes by more than 300 million oil-equivalent barrels, representing billions of dollars of revenues.

The lawsuit announced today was filed in New York Supreme Court, New York County. The suit seeks an order prohibiting Exxon from continuing to misrepresent its practices in this area, and requiring it to correct its past misrepresentations; in other words, to tell investors the truth. The suit also asks the court to award damages, a disgorgement of all monies obtained in connection with the alleged fraud, and restitution. Additionally, the complaint requests the court to direct a comprehensive review of Exxon’s failure to apply a proxy cost consistent with its representations, and the economic and financial consequences of that failure.

The lawsuit is being handled by Assistant Attorneys General Jonathan Zweig and Rita Burghardt McDonough of the Investor Protection Bureau, Mandy DeRoche of the Environmental Protection Bureau, Special Counsel Steven Glassman of the Division of Economic Justice, Special Assistant Attorney General Matthew Eisenson, and Project Attorneys Benjamin Cole and Joanna Zwosta, and Chief Economist Peter Malaspina, under the supervision of Environmental Protection Bureau Chief Lemuel M. Srolovic, Executive Deputy Attorney General Manisha M. Sheth of the Division of Economic Justice, Chief Deputy Attorney General Janet Sabel, and Chief of Staff and Deputy Attorney General Brian Mahanna.