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IEEFA Update: ExxonMobil’s Empty Climate-Risk Report

April 03, 2018
Kathy Hipple and Tom Sanzillo

Institutional-investor coalitions and shareholder-advocacy groups are deciding their next steps in the push for changes to ExxonMobil’s board as a result of the company’s weak recent climate-risk report.

That report—as we describe in a recent investor memo—is defective and largely unresponsive to a resolution from shareholders, led by the office of New York State Comptroller Thomas De Napoli, that prompted it.

De Napoli, weighing in with renewed vigor this week, agrees with our view of the report.

In the face of changes driven by technological advances and global climate change agreements, shareholders have filed numerous resolutions with the company requesting disclosures on the impact of these changes on the company’s reserves and resources—and on the associated financial risks. Just last year, 62 percent of ExxonMobil shareholders approved such a resolution, pressing specifically for a report assessing the risks from a “2-degree scenario”—global warming of 2 degrees Celsius over preindustrial levels, the dangerous mark that climate-change agreements are aiming to avoid.

An oil company blithely wed to status-quo thinking.

ExxonMobil’s resulting report, published last month, blithely dismisses potential climate-change impact as unlikely, concluding that—even if demand falls or regulatory restrictions are enacted—neither will pose a material risk to its reserve calculations or to its financial-risk profile. The report assumes business-as-usual operational strategy, which includes increasing capital expenditures to expand drilling operations in the U.S. and abroad. The report does acknowledge climate risk, but assigns the company no responsibility in having created such risk, and sees no significant role for ExxonMobil in mitigating the risk.

SHAREHOLDERS HAVE EVERY RIGHT TO BE CRITICAL of the substantive content of the report. Many of these investors, including the New York Common Fund, see the report—as we do—as overly general and overly reliant on optimistic assumptions.

And while ExxonMobil may deny the risks that climate change is posing to its business, the market doesn’t. Since March 2016, when the Securities and Exchange Commission sided with shareholder requests to be allowed to vote to request a climate risk report, Exxon’s stock has dropped 11 percent while the Standard & Poor’s 500 Index has risen 32 percent. The market, it appears, is offering a summary judgment on ExxonMobil.

Some of the many flaws in the report:

  • It fails to place the climate issue into a financial risk context;
  • It doesn’t include the current level of baseline financial risks facing the company or layer in carbon restrictions, as other company’s climate risk reports have done;
  • It lacks a complete quantitative picture of the company’s reserves, proven or unproven under a 2-degree scenario;
  • It omits any extended treatment or discussion of reserve valuations;
  • It doesn’t address potential global climate change policies;
  • It avoids mention of investigations by the SEC and two state attorneys general into how the company accounts for its assets;
  • It includes no discussion of financial distress associated with ill-advised capital expenditures over the past decade, such as the 2016 write-off of more than four billion barrels of reserves in the Canadian tar sands or overpayment for the reserves secured in the $6 billion acquisition of XTO natural gas assets.

WHAT EXXONMOBIL INVESTORS WANT IS AN EMPIRICAL UNDERSTANDING of the company’s production assumptions, annual-use assumptions, current and projected acquisitions and other additions to its proven reserve category, and various other relevant economic and financial projections. Absent placing ExxonMobil’s physical and financial reserve calculations in this specific context, the report provides no basis for the company’s conclusion that its reserves and resources are unaffected by carbon constraints.

As the current global energy transition proceeds, it is no longer acceptable for the company to expect shareholders to accept summary statements about valuations, especially when the its current financial reporting is under scrutiny and the company’s recent financial performance is raising so many red flags. The current investment climate requires that ExxonMobil carefully weigh its historic claims to proprietary secrecy against demands for greater transparency—this is the only way it can shore up investor confidence in the quality of the its stock offering.

When a company remains unresponsive to investors, then the exercise of additional shareholder rights is in order.

Shareholders have two immediate paths they can take: They can simply cast a “no” vote for one or all of the company’s proposed board of directors to reflect shareholders’ dissatisfaction with the report and the underlying views it reflects. Or they can invoke proxy access rights that will allow certain large shareholders to offer candidates for board consideration.

Kathy Hipple is the finance professor at Bard’s MBA for sustainability program and a former international institutional investment advisor at Merrill Lynch. Tom Sanzillo is IEEFA’s director of finance.

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IEEFA Investor Memo: ExxonMobil’s Climate Risk Report: Defective and Unresponsive

IEEFA Op-Ed: The Time to Reason With Oil Majors Has Passed

IEEFA Update: The Divestment Movement Gains Steam

IEEFA Update: Red Flags Around ExxonMobil’s Q4 and 2017 Earnings

Kathy Hipple

Former IEEFA Financial Analyst Kathy Hipple is a founding partner of Noosphere Marketing and the finance professor at Bard’s MBA for Sustainability.

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Tom Sanzillo

Tom Sanzillo is Director of Financial Analysis for IEEFA. He has produced influential studies on the oil, gas, petrochemical and coal sectors in the U.S. and internationally, including company and credit analyses, facility development, oil and gas reserves, stock and commodity market analysis, and public and private financial structures.

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