Suits mounting against Big Oil
Investors who fail to note such litigation are at risk
With the announcement last month that San Francisco and Oakland have sued big oil companies for the impacts of climate change, climate litigation is not just on the horizon — it is at the door. Those cities join three other California jurisdictions that have already filed suit against 37 companies for climate effects. After a summer of catastrophic fires, floods and extreme storms made worse by climate change, additional climate litigation is not a question of if but of when.
Investors — particularly those with fiduciary duties to others — should take note. Failing to account for the rising tide of climate litigation puts assets at risk.
Unfortunately for oil producers, the legal elements of successful complaints are increasingly in place. Rapid advances in climate science have made it possible not only to attribute globally significant greenhouse emissions to a discrete group of corporate defendants, but to link those emissions to quantifiable increases in temperatures, sealevel rise and extreme weather events.
This is bad news not only for fossil fuel companies, but for investors that fail to consider litigation risks in evaluating investments in fossil fuels.
On Sept. 12, the New York top court denied efforts by ExxonMobil to shield its auditor’s records from an ongoing state investigation into potential climate-related fraud. The following day, a federal judge in Massachusetts denied Exxon’s motion to dismiss a complaint by the Conservation Law Foundation alleging that the company failed to plan for climate impacts at its facilities, potentially endangering nearby residents. Shell faces a similar suit filed in August. These claims are prescient in the wake of Hurricane Harvey, which caused petrochemical facilities in low-lying areas of the Gulf of Mexico to release toxic contaminants.
Chevron, too, has acknowledged climate litigation as a material financial risk in its securities filings. Saudi Aramco sees potential U.S. litigation risk as a relevant factor in deciding whether to hold its initial public offering in New York. Analysts estimate the Aramco IPO may be overvalued by $1 trillion or more when climate risks are considered.
Climate litigation is unfolding far faster than the tobacco suits that preceded it. It took 30 years of litigation for the first judge to find evidence of corporate malfeasance by a tobacco company. Climate plaintiffs are going into court with compelling evidence of malfeasance already in hand.
In Texas, for example, Exxon faces a class-action securities lawsuit claiming the company misled investors about climate risks. The lead plaintiff in the case, a Pennsylvania pension fund, recently amended its complaint to incorporate new evidence from the New York investigation indicating the misrepresentations were approved at the highest levels of the company.
Pensions and other institutions that must invest over long time horizons will be particularly vulnerable.
San Francisco’s Board of Supervisors has urged the city’s pension fund to pull fund assets from fossil fuels now, rather than face continued losses. To date, fund managers have failed to act, leaving the fund exposed to some $470 million in fossil fuel assets.
Meanwhile, evidence of what fossil fuel producers knew about climate change, and how they responded, continues to mount. Harvard University researchers have proved quantitatively that Exxon misrepresented climate risks to consumers and investors for decades.
Massachusetts courts have held that such conduct, if proven, could violate that state’s consumer protection statute. More than a dozen states have nearly identical laws on the books.
As the world confronts the reality — and costs — of a destabilized climate, a growing universe of plaintiffs will seek redress for its resulting harms. The science has long been on their side; the law is catching up. As costs mount and plaintiffs multiply, fossil fuel companies will find themselves defendants over and over again.
Pension funds and other investors should be equipping themselves to shoulder the financial burden of those vast liabilities, preparing to explain the losses to stakeholders and beneficiaries, or exiting these increasingly toxic assets before the rest of the market does.