Having failed in their attempt to paint energy companies with the same brush as tobacco companies, environmental activists have switched tactics and are now accusing publicly traded oil and gas corporations of hiding the true costs of climate change to their businesses. The effort threatens to change the current focus of financial reporting—which is to provide salient information to investors—and instead serve the policy agenda of liberal activists.
They have enlisted New York attorney general Eric Schneiderman to lead the cause. Earlier this year, he announced that he is looking at whether Exxon Mobil ignores the true risk of global warming in evaluating its energy reserves. If global warming accelerates, Schneiderman’s logic goes, then Exxon would be stuck with fossil fuel reserves rendered worthless by future regulations or a concomitant reduced demand for oil.
“There may be massive securities fraud here,” Schneiderman averred to the New York Times last month. “If, collectively, the fossil fuel companies are overstating their assets by trillions of dollars, that’s a big deal.”
Around the same time, Obama Administration officials applied pressure to the Securities and Exchange Commission (SEC) to issue “detailed and standardized industry specific requirements for disclosure, and, once in place, aggressively hold public companies to account.”
It’s no surprise that global-warming activists are turning to financial disclosure as a political tool. Labor unions and environmentalists have become adept at using shareholder leverage to embarrass corporate managements, forcing them to spend time and money on compliance and defense, and steering them toward the activists’ social and political goals. However, attempting to subvert reporting requirements goes well beyond what these entities have attempted.
The departing SEC chair, Mary Jo White, a Democratic appointee, clearly understands the objective and has shown little interest in changing the rules, despite intense pressure from Elizabeth Warren and others in Congress. White said in a 2013 speech that political disclosure requirements are aimed more “at exerting societal pressure on companies to change behavior, rather than to disclose financial information that primarily informs investment decisions.”
The debate over political disclosures has revolved around what financial experts call “materiality,” which asks whether a particular piece of information is essential for investors to make important decisions about a company, such as whether to buy or sell its shares. The SEC has never offered a bright-line test of materiality, but size of the potential impact counts. Future regulations or taxes on carbon emissions present a potentially big impact, but they also come with a large degree of uncertainty.
In 2010 the SEC issued an interpretive guidance document to remind companies to disclose business risks created by climate change. The commission’s chair at the time, Mary Schapiro, said that the SEC wanted companies also to disclose the potential impact of legislation, regulations, and international accords related to climate change on their businesses, as well as any negative effects on the production process or consumer preferences.
Troy Paredes, an SEC commissioner at the time, pointed out that such disclosures would inevitably be “quite speculative” themselves and may distract investors from focusing on more important information.
“Quite speculative” is an understatement. What Schneiderman is demanding is that energy companies draw the conclusion that, via future changes in legislation or consumer demand, alternative fuels will displace oil and gas and all those billions of dollars in reserves will become stranded. The activists want speculation based on what would basically be political forecasts to be enshrined in law.
Exxon and other energy companies clearly already meet the 2010 standards. For example, in its 2015 Form 10-K filing, Exxon admits that current and future regulations “could make our products more expensive, lengthen project times, and reduce demand for hydrocarbons.” In the same document Exxon lays out its forecasts for energy supply and demand and includes climate change as a factor in its analysis.
Like other energy companies, Exxon continually reassesses the value of its assets, and it recently announced it would de-book 3.6 billion barrels of energy reserves, mainly in Canada, from its balance sheet because lower energy prices may have rendered its oil and gas too costly to extract, at least for the time being.
Announcements like these rarely come as a surprise to the investment professionals who follow Exxon’s shares. Analysts and money managers examine Exxon’s filings to garner information on the firm’s fiscal health, but they also make their own judgments about potential risks that could impact revenue, including climate change. The market consensus as to the future effects of climate change should already be reflected in the price of the shares of Exxon and every other energy company. Investors can make their own predictions about how future governments may change laws pertaining to climate change without needing Exxon to make predictions for them.
The financial disclosure of minor expenses and speculative future costs that pertain to potential government responses to climate change has become a political fetish, and its only effect has been to depress shareholder value by creating needless costs, management distractions, and investor confusion. But that’s irrelevant to those who advocate for such a disclosure, since those people are not out to help shareholders but to get companies to change behavior to fit a political agenda. That’s expressly not the purpose of financial reporting.
Ike Brannon is president of Capital Policy Analytics, a consulting firm in Washington.
