What does ExxonMobil’s Win Mean for the Future of Climate Disclosures?
In a case that has been widely watched, on Tuesday December 10, ExxonMobil got good news in the climate change disclosure lawsuit brought against it by the New York Attorney General. As set forth in more detail in our prior post, the New York Attorney General alleged that ExxonMobil had made misleading statements regarding its use of carbon pricing in evaluating investment decisions and the value of its oil and gas reserves and sought to hold ExxonMobil accountable for those statements. Judge Ostrager concluded that the New York Attorney General’s office had not proven its case because its evidence did not demonstrate that ExxonMobil’s alleged misrepresentations regarding climate risks “would have been viewed by a reasonable investor as having significantly altered the total mix of information made available.”1
While the win is certainly significant for ExxonMobil, there are a number of important lessons in the legal opinion for those responsible for assessments and disclosure of climate risks. Specifically:
- Not all climate change-related litigation is likely to be treated the same. The conclusions reached in climate change securities litigation may not be the same as the conclusions reached in climate change tort cases. The opinion goes to great lengths to be clear that it is confined to the particular securities issues before the court — specifically, whether the evidence showed that a reasonable investor might have changed her investment decisions if ExxonMobil had not made the alleged misrepresentations regarding climate risks.2 The distinction created by the opinion means that the lessons to be drawn for climate disclosures more broadly may be limited. Plainly put:
- The current ruling may have no impact on the cases in which cities and states seek damages for climate change-related events that those jurisdictions claim were made worse by the oil and gas industry’s efforts to conceal the impacts of climate change (for example, the claims of California municipalities that oil and gas companies have worsened the impacts of sea level rise). As noted above, the Court specifically stated that its opinion should have no bearing on any responsibility that ExxonMobil may have for greenhouse gas emissions and their impacts on climate change.
- To the extent that other cases make claims similar to the New York Attorney General’s claim that ExxonMobil’s statements misled investors (most notably the pending case brought by the Massachusetts Attorney General), the Court’s decision in the ExxonMobil case articulates a high bar for demonstrating that climate information was sufficiently important to investors decision-making processes that the failure to disclose that information harmed investors.
- Voluntary climate change disclosures contain risks for the unwary. The ExxonMobil opinion spends nearly 20 pages detailing the climate disclosures made by ExxonMobil in both its voluntary reports and form 10-K filings, reflecting that voluntary reports on climate risk are part of the “mix of information” that could impact how a reasonable investor assesses a company, and how the courts assess liability after the fact. This means that companies that voluntarily disclose, whether in response to investor demands or proactively, should have their disclosures carefully reviewed to ensure that they are complete, accurate, and consistent with the risk disclosures made in their form 10-K filings. Voluntary disclosures should not be created casually, based on the voluntary disclosures of peer companies or investor demands or published without the review of sophisticated securities counsel.
- The materiality of the transition and physical risks associated with climate change depends on the context. While Judge Ostrager’s opinion sided with ExxonMobil, it would be too hasty to conclude that risks arising from climate change are never material in a securities law context. The ExxonMobil case is simply one example of an instance in which a jurisdiction failed to make its case that a reasonable investor would make an investment decision based on ExxonMobil’s allegedly misleading climate disclosures or that ExxonMobil’s stock price dropped when information regarding the alleged misrepresentations became public. There are several reasons it is too soon to conclude that the risks arising from climate change can never be material. These include:
- This case was fundamentally about price forecasts decades in the future, which everyone recognizes are subject to significant uncertainties. Future carbon price forecasts can be distinguished from the potentially disruptive impacts of physical changes in the climate — such has rising sea levels and increasingly disruptive storm events. While this provides a first indication of how carbon price forecasts may be treated in the courts, it does little to address how the risks associated with climate change disruption may be allocated;
- The case was about the impact of certain statements ExxonMobil made between 2013 and 2016. The public’s and investors’ understanding of the effects of climate change on the energy industry and the world economy were during that period, and are still, developing. The actions that an investor concerned about climate change-related risk may take today could be materially different from those that investor would take three years ago or three years in the future given the increasing focus by the investment community on climate issues and broader understanding of climate change-related risks; and
- Climate change-related risks are likely to increase in the future, and the investor community is increasingly focused on how companies are considering the future impacts of climate change. This means that the court’s conclusions in this case, which was focused on the 2013 to 2016 time frame, may not accurately reflect how newly accepted approaches to modeling climate impacts — including scenario analyses employed under the framework of the Task Force for Climate Related Financial Disclosures — would be viewed by future investors or in future litigation.
1 Slip Op. at 3.
2 Slip. Op. at 2.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.