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NY judge rules Exxon Mobil did not mislead investors on internal carbon price

A judge with the New York State Supreme Court has ruled that the state's attorney general failed to prove Exxon Mobil Corp. misled investors about its use of an assumed price on carbon dioxide emissions in making investment decisions to account for long-term climate change risks.

The office of the attorney general "failed to prove, by a preponderance of the evidence, that ExxonMobil made any material misstatements or omissions about its practices and procedures that misled any reasonable investor," Judge Barry Ostrager found Dec. 10.

New York Attorney General Barbara Underwood in an October lawsuit — New York v. Exxon Mobil (No. 452044/2018) — accused Exxon Mobil of misleading investors on the actions the company was taking to address its potential financial exposure to climate change risks.

Underwood recalled that Exxon Mobil told investors for years that it was accounting for the risk of potential future governmental regulations on climate change by applying a shadow price, or proxy cost, for carbon emissions to its investment decisions and planning. The problem, according to Underwood, was that Exxon Mobil frequently did not apply the same proxy costs to all its business activities. Instead, the company in many cases applied a second set of much lower proxy costs or no proxy cost at all.

Companies sometimes use internal carbon pricing to account for the possibility that the federal or state government eventually could impose a price on carbon dioxide emissions. In theory, if the proxy price is set appropriately high enough, it helps companies know when to pick a lower-carbon option that could prove less expensive in the long-run, assuming governments eventually put a price on carbon.

The lawsuit also targeted Exxon Mobil's climate change reports and accused the company of giving investors a misleading analysis of future scenarios, including by understating the risks it could face if governments around the world act to limit global warming in line with the goals of the Paris Agreement on climate change.

Underwood sued Exxon Mobil under the Martin Act, a 1921 state securities law that predates the creation of the federal Securities and Exchange Commission and grants the attorney general broad authority to compel testimony and subpoena records. The Martin Act is a common tool for the state attorney general's office to pursue companies that may have committed securities fraud.

To establish liability under the Martin Act, Ostrager said, the attorney general must show that Exxon Mobil misrepresented material facts important to the company's investors. Exxon Mobil argued that it did no such thing, asserting that it was justified in not applying one set of greenhouse gas cost assumptions across all investment decisions but instead substituting other data when better information was available, such as about the applicable regulatory environment.

Ostrager found "it would be manifestly inappropriate for this court to rule either that ExxonMobil's default [greenhouse gas] assumptions on future projects (none of which were ever disclosed to the public) should have been applied uniformly, or that they should have had the same values assigned to the proxy cost of carbon, which were used for an entirely different purpose and which were not disclosed with any specificity, other than to indicate variation by time in the distant future and by region."

The judge also ruled that the attorney general failed to prove that Exxon Mobil misrepresented facts material to investors. The attorney general made no allegation in this case "that anything ExxonMobil is alleged to have done or failed to have done affected ExxonMobil's balance sheet, income statement or any other financial disclosure," Ostrager wrote.

Exxon Mobil's disclosures were not meant to allow investors to conduct a "meaningful economic analyses" of Exxon's internal planning assumptions "and no reasonable investor would have viewed speculative assumptions about hypothetical regulatory costs projected decades into the future as 'significantly altering the total mix of information made available,'" Ostrager said.

"At bottom, the case presented by the office of the attorney general is largely predicated upon the proposition, which this court rejects, that during the period of time covered by the complaint, ExxonMobil's disclosures led the public to believe that its GHG cost assumptions for future projects had the same values assigned to its proxy cost of carbon," the judge added.

Finally, the judge stressed that "nothing in this opinion is intended to absolve ExxonMobil from responsibility for contributing to climate change ... But ExxonMobil is in the business of producing energy, and this is a securities fraud case, not a climate change case."