Shareholders Sue Exxon for Misrepresenting Climate Risks

By Karen Savage

A group of Exxon investors has filed suit in federal court against several of the company’s officials, directors and board members for failing to protect their investments as well as the company from the risks of climate change.

Saratoga Advantage Trust Energy and Basic Materials Portfolio, a mutual fund of Saratoga Advantage Trust, filed a derivative lawsuit in U.S. District Court in Trenton, N.J., on Tuesday against several current and former Exxon officials, including current chief executive officer and chairman of the board Darren Woods; former chief executive Rex Tillerson; principal financial officer and senior vice president Andrew Swiger; and several members of the company’s auditing committee.

A derivative suit is a lawsuit brought by shareholders against a corporation’s directors and management for failing to exercise their authority for the benefit of the company and all of its shareholders. This type of suit often arises when fraud, mismanagement or dishonesty is ignored by officers and the board of directors of a corporation and it allows the shareholders to sue on behalf of themselves and on behalf of the corporation. 

Saratoga alleges that the officials “knew, were reckless, or were grossly negligent in not knowing” that Exxon was misleading its investors regarding the risks of climate change to its business. It also alleges that the officials received “excessive compensation and benefits” while the company failed to accurately value its reserves, used two sets of numbers to calculate climate risk and filed misleading paperwork with the Securities and Exchange Commission (SEC).  Saratoga said the value of its investments dropped as a result. 

The defendants “did not adequately evaluate the potential impact of climate change-related risks on the value of Exxon’s assets and its long-term business prospects,” Saratoga alleged in the suit. 

The investors claim that some Exxon officials created a “culture of lawlessness within Exxon” and failed to prevent the oil giant from engaging in “unlawful acts,” while others “either knew, were reckless, or were grossly negligent in disregarding the illegal activity of such substantial magnitude and duration.”   

They say that the defendants knew that Exxon’s asset valuation processes were inaccurate and failed to did not accurately assess the risk climate change posed to the company.  They also allege the company misled investors and the public by failing to accurately account for the possibility that some of its assets would become stranded. 

They point to Exxon’s Managing the Risks report, which was issued in response to shareholder pressure. In the report, Exxon said it “takes the risk of climate change seriously and continues to take meaningful steps to help address the risk and to ensure our facilities, operations and investments are managed with this in mind.”

But when addressing how it is planning for the possibility of stranded assets, or whether or not its  present oil and gas reserves would be recoverable—also referred to as carbon asset risk—Exxon said climate change would not result in the stranding of its assets.

“We are confident that none of our hydrocarbon reserves are now or will become stranded,” Exxon said, sidestepping shareholders’ demands to know how the company is preparing for carbon asset risk.

Saratoga alleges that members of Exxon’s auditing committee “completely and utterly failed in their duty of oversight and failed in their duty” to review the company’s accounting and other financial practices and disclosures.

Exxon did not immediately respond to a request for comment. The company is facing mounting legal pressure over its climate change-related disclosures.

The New York attorney general’s office filed a lawsuit against ExxonMobil last year for allegedly defrauding investors for years by deliberately downplaying the climate risks to its business and long-term financial health.  Massachusetts Attorney General Maura Healey is investigating the company for potentially deceiving shareholders and customers. Healey began her investigation in 2016 after investigative reporting revealed that for decades Exxon knew about and planned internally for climate change for decades but publicly denied those risks.

A recent SEC investigation centered on how the company determined the risk of future greenhouse gas emissions regulations and how it communicated those risks to investors. The SEC also examined Exxon’s policy of not including the value of oil reserves when accounting for that risk. That investigation concluded when the SEC announced last year that it would take no enforcement action. 

Saratoga is asking Exxon to “take all necessary actions to reform and improve its corporate governance and internal procedures to comply with applicable laws and to protect Exxon and its shareholders” from further losses. 

The suit says firm contends the actions and failures of Exxon officials have “irreparably damaged Exxon’s corporate image and goodwill.”.

“For at least the foreseeable future, Exxon will suffer from what is known as the ‘liar’s discount,’ a term applied to the stocks of companies who have been implicated in illegal behavior and have misled the investing public.”