Corporate > AG Deal Diary > Climate Change Disclosure - Heads I Win, Tails You Lose?
16 Apr '14

As publicly traded companies consider potential risks to their assets from a changing climate, the chorus of individuals and institutions advocating for public disclosures of these risk assessments continues to grow. In this post, originally featured on Akin Gump’s Speaking Energy Blog, we discuss the idea of “stranded assets” and recent developments involving ExxonMobil’s response to such shareholder petitions regarding risk analysis and disclosure.

Arjuna Capital, a sustainable wealth management platform, and As You Sow, an environmental corporate responsibility advocacy group, have been advocating for publicly traded companies to assess and disclose the risks that their assets will be “stranded” as a result of changing regulatory regimes designed to address climate change. The rationale underlying these efforts derives from the notion that a “carbon bubble” exists. Author and climate activist Bill McKibben is often credited with introducing the notion, basing it on a U.K. research group’s contention that upwards of 80 percent of the world’s oil, gas and coal reserves would become “stranded” if GHG emissions were controlled sufficiently to limit global warming to an increase of 2º C.

The entire carbon-bubble concept and the resulting drive for disclosure rests on the assumption that the major emitting countries will be able to agree to effective and binding requirements to reduce emissions. Experience under the United Nations Framework Convention on Climate Change, the international treaty that purportedly set binding obligations on industrialized countries to reduce emissions of greenhouse gases, suggests that this assumption is, by no means certain to prove reliable. If anything, the individual self-interest of so many countries emitting significant amounts of GHGs renders the assumption highly uncertain.

Nevertheless, in the face of shareholder petitions seeking to compel ExxonMobil to prepare and issue an analysis of the risk that its fossil fuel assets will be stranded, the company agreed to undertake the requested analysis. Earlier this month, ExxonMobil released two reports, Energy and Carbon: Managing the Risks and Energy and Climate, outlining ExxonMobil’s plans for capital expenditures, policies limiting greenhouse gas emissions and efforts to reduce such emissions.

ExxonMobil assessed the global demand for energy and the relationship between energy supply and economic growth, likely scenarios for future constraints on carbon and the risks from climate change. ExxonMobil concluded that “none of our hydrocarbon reserves are now or will become ‘stranded.’” Energy and Carbon: Managing the Risks at 1.

Sustainability and disclosure activities expressed disappointment and pledged to continue pushing for disclosure of stranded assets.

  • “Shareholders need more in-depth information about how Exxon is positioned to withstand climate risk. We will continue working with Exxon and other fossil fuel companies to increase disclosures about these critical issues, including how companies analyze value of capital investments across a range of scenarios, including the worst-case scenario.” Danielle Fugere, president of As You Sow;
  • “While Exxon asserts that we will face social upheaval if carbon-based fuels are limited, we believe the greatest social disruption will come from climate change itself in the form of physical displacement and food scarcity—as outlined in today’s release of the IPCC report.” Natasha Lamb, director of Equity Research and Shareholder Engagement, Arjuna Capital.

The stock market reacted differently to ExxonMobil’s reports. “Markets Unmoved by Exxon Mobil's Fracking [sic] Disclosure,” EnergyWire, 4/7/14.

Given the nature and scope of the uncertainties ExxonMobil evaluated in preparing its reports, as well as the unpredictable nature of future global agreements to reduce emissions, if any, ExxonMobil’s conclusion is eminently reasonable. Investors surely have available to them information sufficient to understand that ExxonMobil’s primary business is the exploration, production and sale of fossil fuels. “ExxonMobil is the world’s largest publicly traded international oil and gas company. We hold an industry-leading inventory of global oil and gas resources. We are the world’s largest refiner and marketer of petroleum products, and our chemical company ranks among the world’s largest.

Those who make investment decisions based in whole or in part on sustainability principles surely have the information necessary to make such decisions regarding ExxonMobil securities. Indeed, it remains unclear how groups pushing for disclosures such as those made by ExxonMobil believe that the disclosures provide meaningful information on which shareholders may decide whether to buy, hold or sell securities.