For many years, I have been raising the possibility of climate change-related corporate and securities litigation. However, despite my best prognostication, the climate change-related corporate and securities lawsuits have basically failed to materialize – that is, until now. On November 7, 2016, investors filed a purported securities class action lawsuit in the Northern District of Texas against Exxon Mobil Corporation and certain of its directors and officers. The lawsuit specifically references the company’s climate change-related disclosures, as well as the company’s valuation of its existing oil and gas reserves. One lawsuit doesn’t make a trend, and many of the lawsuit’s allegations relates specifically to Exxon Mobil and its particular disclosures. Nevertheless, the filing of the lawsuit raises the question whether there may be other climate change-related disclosure cases ahead. A copy of the November 7, 2016 lawsuit can be found here.
The plaintiff’s complaint alleges that throughout the purported class period, Exxon “repeatedly highlighted the strength of its business model and its transparency and reporting integrity, particularly with regard to its oil and gas reserves and the value of those reserves.” The complaint alleges that Exxon’s public statements were materially false and misleading as they failed to disclose:
- that Exxon’s own internally generated reports concerning climate change recognized that the environmental risks caused by global warming and climate change;
- that, given the risks associated with global warming and climate change, the Company would not be able to extract the existing hydrocarbon reserves Exxon claimed to have and, therefore, that a material portion of Exxon’s reserves were stranded and should have been written down; and
- that Exxon had employed an inaccurate “price of carbon” – the cost of regulations such as a carbon tax or a cap-and-trade system to push down emissions – in evaluating the value of certain of its future oil and gas prospects in order to keep its reserves materially overstated.
The complaint alleges that these alleged misrepresentations caused the company’s share price to be inflated; while the share price was inflated the company conducted a $12 billion public debt offering.
The complaint further alleges that in mid-August 2016 and late September 2016, the market learned that federal regulators were scrutinizing Exxon’s reserve accounting related to climate change and global warming and the company’s refusal to write down any of its oil and gas reserves in the face of declining oil prices. However, on October 28, 2016, the company disclosed that “it might be forced to write down nearly 20% of its oil and gas assets.” The company’s share price allegedly fell on the news.
The complaint’s allegations about the company’s climate change-related disclosures had previously been raised by regulators that had subpoenaed the company’s internal research regarding climate change risks, as discussed here. In connection with these regulatory investigations, questions previously had been raised about whether the company’s had failed to disclose that its own internal findings concerning climate change. In September 2016, it was reported that the SEC was investigating the company’s climate change disclosures.
The company’s October 28, 2016 disclosure that it may need to write down some of its oil and gas assets also drew a great deal of attention and scrutiny (refer for example here).
As I said at the time when the investigative subpoenas directed to Exxon first emerged, climate change-related disclosures are going to continue to be the source of scrutiny that potentially could affect a wide range of companies. To provide just one example, on November 9, 2015, the NYAG’s office announced (here) that it had reached a settlement with Peabody Coal of charges that the company’s climate change related disclosure violated New York law. The company agreed to file revised shareholder disclosures that “accurately and objectively represent these risks to investors and the public.” The terms of the company’s agreement with the NYAG’s office can be found here.
Much of this attention and scrutiny is the result of initiatives by environmental activists and politically motivated activity by elected officials. However, environmental activists are not the only ones agitating to make climate change disclosure a priority. Indeed, for several years now, the National Association of Insurance Commission’s has been actively campaigning to make the disclosure of climate change risks a priority for the insurance industry in the United States. The NAIC’s latest update on the topic can be found here.
Enterprising plaintiffs’ lawyers seeking to diversify their product line will likely will assess whether or not climate change disclosure represents a promising new liability area. Just as the question of future global climate change itself is fraught with uncertainty edged with menace, the question whether climate change-related disclosure represents a potential new source of corporate liability exposure is itself both uncertain and more than a little scary. The issue represents a potential concern for companies in a variety of industries; not just energy companies like Exxon, but also utilities, mining companies, automobile manufacturers, transportation companies, insurance companies, and many others.
It may be that D&O insurance underwriters decided they didn’t need to worry about climate change-related exposures. As I have noted in the past with respect to these areas, the problem has been the possibility that these issues might move from the background, where they have been, to the front burner. The filing of the Exxon securities lawsuit may be the first move in that direction.