At Exxon’s 2017 annual meeting, a majority of the company’s shares were voted in favor of a shareholder proposal requesting the production of a long-term risk assessment taking into account the Paris Agreement’s two-degree target. In response, Exxon published a report in February 2018 aimed at satisfying the proposal’s request. It was met with widespread criticism, primarily because of Exxon’s assertion that its reserves face “little risk” under an average of two-degree scenarios. Now, with a lawsuit claiming that Exxon misled investors, we may be learning just how the company was able to come to that conclusion.

Messing with Texas

New York’s attorney general has been investigating Exxon since 2015 over allegations that it misled the public about its exposure to climate-related risk. On October 24, 2018, the investigation culminated in a lawsuit against the firm.

Since at least 2013, Exxon has publicly touted its application of a ‘proxy cost’ (aka ‘shadow price’) on GHG emissions to its business. Effectively, this is a way to account for potential climate regulation and determine whether investments are economically viable. Although some countries already implement a price on carbon, these prices may rise and other countries may begin to follow suit as the world strives to keep global warming below 2°C. Companies can demonstrate the viability of their business in the future by modeling a price on carbon which rises over time.

However, as set out in New York’s lawsuit, Exxon misled investors by consistently implementing a lower internal proxy cost than what was disclosed to the public. For example, New York alleges that the firm publicly maintained for years that its proxy cost in OECD countries was $60 per ton by 2030, while its internal guidance instructed planners to use a cost of $40 per ton. To compare, Chevron decided not to disclose its proxy cost, stating that “the carbon cost forecasts used in [its] business are calculated using [its] dedicated resources, including proprietary information, modeling and analysis,” and that disclosing this information “could erode [its] competitive advantage.” In its 2016 annual report, ConocoPhillips stated that it used an estimated market cost of GHG emissions in the range of $9 to $43 per ton, “depending on the timing and country or region.” However, it now claims to use a cost of $40 per metric tonne, which has become a common figure in the industry.

At its core, the suit is predicated on allegations that Exxon misled the public about its use of a proxy cost on carbon for: (i) cost projections, including in investment decision-making; (ii) business planning; (iii) oil and gas reserves and resource base assessments; (iv) impairment evaluations; (v) demand and price projections; and (vi) business risks posed by a two degree scenario. So, essentially everything used by research analysts to evaluate the degree to which Exxon’s valuation could be at risk in a decarbonizing world. Exxon’s alleged fraud is compared to the ‘Potemkin village’ myth to illustrate how it deceived investors to protect itself from shareholder proposals and inquiries about climate change regulatory risk.

Cost Ineffective

Stranded asset theory is one of the foremost themes in shareholder proposals at oil and gas companies in recent years. Proponents of the theory argue that oil and gas majors will have to write down valuable assets as the world economy decarbonizes. Because a proxy cost on GHG emissions would approximately capture the future costs from increasingly stringent climate regulations, it could play a pivotal role in determining whether a hydrocarbon-intensive project would be economically feasible. In this case, Exxon allegedly used a lower proxy cost internally than what it disclosed to the public.

In modeling the costs of Exxon’s oil sands projects in Alberta, the use of a lower, undisclosed proxy cost was internally referred to as an ‘alternate methodology.’ Allegedly, through this accounting method, Exxon effectively applied a flat cost of $5 per ton on its GHG emissions in Alberta, which sharply contrasts with its publicly represented proxy cost of $80 per ton in Canada by 2040. As argued in the suit, for Kearl, the company’s largest Canadian oil sands investment, application of the lower proxy cost led to an approximate 94% reduction in cost projections. Internal communication from Exxon’s project planning staff revealed concerns that application of the publicly disclosed proxy cost would lead to “massive GHG cost” and “large write-downs,” but management told the planners to disregard the figure disclosed to the public. The state also maintains that Exxon failed to implement any proxy costs on carbon into its cost projections for its 25% stake in the Syncrude oil sands asset in Alberta. As argued in the suit, Exxon’s oil sands assets comprise roughly a quarter of its resource base, and thus its “misrepresentations concerning its application of proxy costs at its Alberta oil sands assets are highly material.”

During the planning stage, numerous other assets allegedly received the same treatment, either being subject to vastly lower proxy costs than what was represented to the public or, in some cases, none at all. For example, in the U.S., the AG argues that Exxon failed to apply the publicly represented proxy cost in some cases in which it had either received a permit to emit GHGs or found that no permit was required. In Cyprus, which was subject to the EU cap-and-trade system, Exxon allegedly avoided applying a proxy cost to a model for an LNG project, which was recognized as a “material” omission by an employee. Multiple employees in Exxon’s downstream business also stated that no proxy cost was used for project planning purposes.

According to the suit, Exxon also misled investors about the value of the company’s assets by intentionally excluding a proxy cost in its impairment evaluation process for all assets prior to its 2016 year-end evaluation. Moreover, according to the AG, once it began incorporating the proxy cost in its 2016 year-end impairment evaluations, it did so in a “limited and internally inconsistent manner” which made its impairment-related claims materially misleading.


Two-degree scenario planning is another topic that has come up in recent oil & gas shareholder proposals, and it’s another topic on which Exxon allegedly misled investors. In 2014, Arjuna Capital withdrew its resolution at Exxon after the company agreed to publish a climate risk report. The New York lawsuit claims that Exxon used “unreasonable and undisclosed assumptions” in the report that resulted in wildly overstated cost projections under a two-degree scenario. In several ways, its analysis allegedly conflicted with an MIT research model (which analyzes interactions between humans and the Earth system) cited in the report. An MIT economist who worked on the model contacted Exxon to warn that it was misleading the public about the cost impacts of a two-degree scenario on a typical American household. However, Exxon stood by the analysis through at least June 2016.

Proxy Advice

The state is crystal clear about why investors should be concerned with the multi-year investigation’s findings, regardless of how ESG is incorporated in their investment strategies:

Investors in Exxon’s equity and debt securities were harmed, and are still being harmed, as a result of Exxon’s false and misleading statements and omissions of material fact.

Ultimately, according to the AG, Exxon misled investors about the extent to which it was accounting for climate change regulatory risk; as its portfolio of risky assets and investments grew, it became increasingly exposed to risk associated with a two-degree scenario. Yet, the scope of the damage from Exxon’s alleged fraud in part reflects investors’ growing appetite for disclosure.

Recent years have seen shareholders propose resolutions requesting additional disclosure concerning companies’ scenario planning against a range of low-carbon scenarios. Increased support for these proposals in the 2017 proxy season prompted the rapid adoption of 2°C scenario analysis reporting in the utilities and energy sectors, as companies see the potential influence of climate disclosure in fending off activism, and even boosting their share price. These factors may have provided a powerful incentive for companies to provide spurious information about climate risk accounting, particularly in the absence of a standardized reporting method.

The New York state lawsuit, along with the growing momentum of the TCFD reporting standards, sends a formidable counterpoint: climate disclosure is no longer nascent, and cutting corners could land companies in serious trouble. The lawsuit also serves as a reminder that deception can be traced all the way up the ranks, including the board:

Exxon’s fraud was sanctioned at the highest levels of the company. For example, former Chairman and Chief Executive Officer (CEO) Rex W. Tillerson knew for years that the company’s representations concerning proxy costs were misleading.

The Defense

Exxon refutes the state’s allegations in a July 2018 brief. It claims that the AG’s investigation shifted significantly over the years leading up to the suit. It also argues that it applies both proxy costs and GHG costs, clarifying the differences between the two terms and claiming that the AG conflates the terms in the suit. Responding to the October complaint, Exxon also published a statement in which it categorized the allegations as “a product of closed-door lobbying by special interests, political opportunism and the attorney general’s inability to admit that a three-year investigation has uncovered no wrongdoing.” Exxon denies all allegations, except as specifically admitted in a November filing. Meanwhile, although the AG asked judge Barry Ostrager to recuse himself from the case on the basis of his Exxon stock ownership, the motion was denied.

The trial is set to begin in October 2019, leaving plenty of time for those interested to delve into the already expansive docket of memos, briefs, arguments, and rebuttals filed in court.

I’m Walking Here

In the original ‘Potemkin village’ myth, the governor of a war-ravaged Crimea, Grigory Potemkin, built temporary settlements along the visiting route of his beloved Catherine II to deceive her into believing in the region’s stability. When the Empress passed through a settlement, it would be torn down and rebuilt farther down her path.

The lawsuit references the myth in a poignant metaphor:

Through its fraudulent scheme, Exxon in effect erected a Potemkin village to create the illusion that it had fully considered the risks of future climate change regulation and had factored those risks into its business operations.

While corporate reporting on climate change has weathered plenty of criticism, to date that criticism has emanated primarily from the environmental activist community. New York’s suit raises the stakes, demonstrating that misleading climate risk disclosure may amount to financial fraud. That’s concerning for the U.S. oil and gas industry more broadly: when Exxon speaks, its peers listen closely.

Max is an analyst covering environmental, social and governance issues.

Updated on January 23, 2019
In an earlier version of this blog post, we referred to the AG’s allegations against Exxon as findings. We have updated the blog post to reflect the defendant’s position and summarize subsequent legal developments and filings.