November 13, 2015

The Exxon Mobil Investigation and Information Disclosure

Climate Change

by Justin Pidot, Associate Professor of Law, University of Denver Sturm College of Law

News broke last week that the New York Attorney General is investigating Exxon Mobil for providing false information about climate change to investors and the public. Similar investigations of other energy companies may be on the horizon.

Specifics about the investigation are in short supply. This could be, as an article in Forbes suggests, the opening salvo in a billion dollar litigation campaign like that brought against big tobacco for concealing information about the health risks of smoking. Or it could be a more limited effort to ensure that energy companies fully comply with their obligations to disclose information under securities laws.

My guess is the latter is true. Just four days ago, the New York AG’s office announced that it had entered a settlement with Peabody Coal under which the company would revise shareholder documents and more fully disclose climate risk in the future. In 2008 and 2009, the New York AG entered similar settlements with three other energy companies. These settlements do not involve million or billion dollar payments, but rather, simply require better information about the risks that climate change poses to the financial health of the companies involved. Frankly, they look a lot like run-of-the-mill settlements of potential securities violations. No one would pay any attention except they involve the words “climate change.”

Not only does this investigation seem relatively unremarkable, it also seeks to vindicate principles upon which we should generally be able to agree. Legal regimes that require information disclosure need enforcement to stay vigorous.

Mandatory information disclosure is a staple of environmental law and sometimes serves as a substitute for substantive regulatory efforts. In other words, rather than requiring a company to invest in pollution control technology, we sometimes merely require a company to publicly report the pollution that it releases. Take two classic examples: The federal Toxic Release Inventory requires industrial facilities to report releases of certain toxic chemicals into the environment, and California’s Proposition 65 requires warnings if a product or location may contain chemicals known to cause cancer, birth defects, or other reproductive harms.

Federal securities law also requires disclosure of environmental information by publicly traded companies. In 2010, the Securities and Exchange Commission issued a guidance memorandum explaining businesses may need to disclose climate risks like the vulnerability of their infrastructure to “severe weather or climate related events” or the potential for declining revenue because of a reduced “demand for goods that produce significant greenhouse gas emissions.”

These laws can only function if companies comply truthfully and completely. If executives at Exxon affirmatively lied or intentionally concealed information they were required to disclose, that’s a big deal, and one that legal authorities should take seriously.

There’s some reason to believe that full compliance has not occurred. In a letter to the Securities and Exchange Commission earlier this year, a group of institutional investors that manage $1.9 trillion in assets raised the concern that oil and gas companies were not adequately meeting their obligations to disclose the risks that climate change poses to their businesses. And then there are those settlements that the New York AG’s office has already entered with energy companies.

Disclosure laws like these are important and serve several functions. First, they generate information for the public, policy makers, and investors. Better information may mean more effective laws in the future and more lucrative investment decisions. It may also lead to changes in consumer behavior. People may be willing to pay a little more for a product that is not labeled as potentially causing cancer.

Second, mandating disclosure often changes corporate behavior. It turns out that companies don’t like to admit that their activities harm public health or the environment. Rather than identifying the release of a toxic chemical, a company may invest in making sure that no such release happens. Similarly, companies may decide to build safeguards around their facilities rather than admit they are vulnerable to severe hurricanes linked to climate change. In this way, information disclosure can itself produce public benefits.

To my mind, information about climate change cannot substitute for real and concerted effort to reduce carbon emissions. Nor does it relieve us of the obligation to prepare vulnerable communities for a future climate regime that, in many places, may prove less hospitable than the one that has allowed human civilization to flourish. But information can help. And I hope the New York AGs office continues to hold companies accountable for their legal obligations to disclose climate risks.