By Meric Sar
An ongoing investigation by the New York Attorney General into whether one of the world’s largest oil-producers misled markets about the risks posed by climate change may prove to be a groundbreaking and watershed moment. As other state and federal authorities are expected to pursue similar actions, it is becoming increasingly clear that the fossil fuel industry is facing a bolder regulatory environment, especially with regard to the integrity of the industry’s marketing and research practices. This trend is particularly meaningful when reviewed in tandem with the Obama Administration’s achievements in steering America and the world towards renewable energy, sustainability and energy independence.
THE INVESTIGATION INTO EXXON
The investigation began with a subpoena issued by Eric Schneiderman, New York Attorney General, to Exxon in early November 2015, requesting a massive discovery of Exxon’s corporate records going as far back as 1970s. The Attorney General is seeking to understand if Exxon breached New York State’s Martin Act by misleading the market and greater public about climate change.
For the prosecutor, a case could be built if enough evidence exists to prove that Exxon actually knew – or reasonably should have known – that climate change is real, but failed to properly disclose this information and its potential implications on the company’s business outlook. Since the risks associated with climate change would potentially hurt Exxon’s stock prices, Exxon may also be accused of causing market-price distortion by concealing this “inconvenient truth” and even orchestrating efforts to re-frame the public opinion, to the extent of substantially influencing “independent” scientific research on global warming.
Several investigative reports by Inside Climate News and the Los Angeles Times spurred Schneiderman’s investigation. These reports allegedly document that in 1970s, when global warming began attracting scientific attention, Exxon “assembled a brain trust [that deepened] the company’s understanding” of climate change. According to the reports, in the late 1980s, the company went into a policy change and adopted a strategy of “climate denial,” manufacturing “doubt about…global warming,” despite the potential research information available to the company that proves otherwise. For years, as a commercial company, Exxon has downplayed the possible effects of climate change-related regulations in public reports to investors by referring to the issue as “uncertain,” “difficult,” or “not possible” to reasonably predict.
FREE SPEECH AND CORPORATIONS
According to some, lying is an ordinary American pastime, especially in politics, and this investigation represents a cynical and heavy-handed government action to curb free speech in the climate change debate. Yet, Exxon is not an ordinary citizen with a big mouth. Energy companies are savvy Washington juggernauts, and have been historically instrumental in shaping the policy debate and scientific discourse surrounding our understanding of climate change. Today, under a series of laws and court rulings, including the much-debated Citizens United case, corporations enjoy extensive free speech rights, which has been criticized by some as too broad and counter-intuitive to democracy. However, the exercise of political speech by a commercial enterprise can conflict with its other duties towards the market.
Under the U.S. Constitution, even dishonest or misleading political speech is generally accepted to be free, and punishment of people (or corporations) for expressing merely political speech is unconstitutional. However, restriction of free speech is common on various state and federal law grounds, especially in relation to securities fraud. In New York, the Martin Act gives state prosecutors broad powers to prosecute financial fraud, and sets a lower threshold to prove direct harm and causation in comparison to federal laws. The U.S. Securities and Exchange Commission (“SEC”) regulates and prohibits even truthful speech by companies in many situations. A duty of truthfulness about material business information for publicly traded companies is essential to balance the asymmetrical power of influence that the corporations are enjoying in shaping the U.S. politics, especially in the aftermath of the Citizens United.
THE MARTIN ACT OF NEW YORK
The Martin Act is an almost century-old New York state enforcement statute that predates the SEC. Originally, the law only conferred the power to pursue civil suits but was later amended to allow for criminal prosecutions. The Act gives broad powers to state prosecutors in issuing remedial measures to maintain the integrity of the markets. It has been used to stop Ponzi schemes, mortgage fraud and Wall Street abuses in the past. Hence, using it with respect to climate change may play a crucial role in bridging the shortcomings of federal authorities due to the legal constraints on their powers.
In his subpoena to Exxon, Schneiderman is seeking a myriad of documents related to Exxon’s internal research on the causes and effects of climate change, and how this information was used in business decisions, projects, analysis and communications with trade groups. Experts think the issue of what counts as a “material” information will be the decisive factor in the case. Not all undisclosed research is material information that needs to be disclosed to the public if the resulting information is obvious or otherwise generally available to the knowledge of investors. This, of course, entails another question: whether Exxon or other similarly situated energy companies are in a unique position, holding certain information that is not available to the rest of the world on the issue of climate change.
Exxon embraced the need to curb greenhouse gases in 2006, following the company’s change in its chairman and CEO. Since 2009, the Texas-based company has advocated for a revenue-neutral carbon tax as the fairest way to cap harmful emissions. According to the General Counsel of Exxon, the “[company] scientists have been involved in climate research and related policy analysis for more than 30 years, yielding more than 50 papers in peer-reviewed publications.” Its scientists have participated in the United Nations Intergovernmental Panel on Climate Change since its inception and were involved in the National Academy of Sciences review of the third U.S. National Climate Assessment Report.
Despite the rosy picture Exxon tries to paint, many environmental organization take issue with Exxon’s climate denial activities. In a 2007 report, the Union of Concerned Scientists accused the company of financing “a sophisticated disinformation campaign…to deceive the public” about global warming. The report argues that Exxon Mobil gave $16 million to 43 groups that preached climate change skepticism from 1998 to 2005. If Exxon knowingly lied or downplayed the risks of climate change to the public or investors, as the 2007 report argues, they may have broken the law.
RISE OF A GREENER REGULATORY CULTURE?
The current probe comes after the New York Attorney General Schneidermann reached a settlement with the largest U.S. coal mining company, Peabody Energy, after the company was accused of misleading investors about the financial risks of climate change. In the settlement, Peabody agreed to include more comprehensive disclosures in its disclosures to the market about the potential costs of climate-related regulations. Settlements such as this – although do not represent a binding judicial authority – reflect a growing consensus and a pattern of self-correcting behavior among the high echelons of the American economy, which is gearing up for a sustainable energy future.
A discussion on the causal link between climate change and the fossil fuel industry often slips away from having its day in the courtroom. A judicial inquiry into the truth of global climate change as a fact has been thus far too elusive for the courts to handle despite widespread consensus among the scientific community about the anthropogenic climate change. The magnitude of the phenomenon defies a conclusive study, and the divisive nature of the surrounding public debate moves the courts to defer to a regulatory culture that has been traditionally protective of the global interests of U.S. and global energy conglomerates – an industry that has been a historical stalwart of the U.S. economy. Whether this investigation ends in a trial or not, big changes may be on the horizon.
Meric Sar is a Staff Writer for Rights Wire.
The views expressed in this post remain those of the individual author and are not reflective of the official position of the Leitner Center for International Law and Justice, Fordham Law School, Fordham University or any other organization.
Photo Credit: Mike Mozart/Creative Commons