As discussed in Part 1 of this series, New York Attorney General Eric Schneiderman has begun a Martin Act investigation of Exxon Mobil. He wants to prove Exxon Mobil defrauded its shareholders by lying about climate change and the associated political risks to the oil industry. At a minimum, he wants to cow other companies into preaching “consensus” climatology in their annual reports.
Schneiderman’s thesis — that Exxon Mobil concealed from investors the financial risks created by the “Keep It In The Ground” global warming movement — is loony. Nonetheless, he poses a real threat to the shareholders he pretends to be protecting. That’s because the Martin Act sets a very low bar for establishing guilt and places no limit on economic losses an AG may impose via damage awards and fines.
To win the case, Schneiderman does not have prove that Exxon Mobil intended to defraud anyone. Nor does he have to show that any shareholder was actually injured, that any shareholder relied on the company’s “misrepresentation” when purchasing stock, or that the company made false statements. He just has to persuade a jury that Exxon Mobil failed to present “material” facts — such as, presumably, the gloom-and-doom assessments of consensus climatology.
Schneiderman’s probe of Exxon Mobil is conveniently timed to feed off the green campaign to indict fossil-fuel industry executives under the Racketeer Influenced Corrupt Organizations (RICO) Act, and recent media reports claiming Exxon has known since the 1970s how bad its products are for the global climate system.
But the probe also appears to be part of a long-term strategy. Earlier this week, Schneiderman announced he had reached a Settlement Agreement with coal giant Peabody Energy — the culmination of a three-year Martin Act inquiry. Maybe he chose to go after the smaller opponent first to establish climate-related precedents for hunting bigger prey.
Let’s review the Settlement Agreement (SA) and consider how Peabody should respond to it.
Schneiderman claims Peabody misled shareholders by understating the “severe adverse impacts to its business” from potential climate change regulation. Peabody “neither admits nor denies” Schneiderman’s “findings” of misrepresentation (SA, p. 8). Nonetheless, to settle with Schneiderman, Peabody agrees that in “any future SEC filings, or any future communications with shareholders, the financial industry, investors, the general public, and others,” it will not claim an inability to predict the financial impacts of future climate policy laws or regulations, will disclose any estimates it makes of such impacts, and will present all coal-market projections from experts it cites (such as the International Energy Agency), including estimates that assume future adoption of climate policy laws and regulations, not just projections under “current policies.”
It’s noteworthy what the settlement does not require of Peabody or its executives: pay damage awards or fines, or do jail time. Apparently, Schneiderman could not find any misrepresentation that a reasonable person would regard as fraud.
Schneiderman claims that in its 2011, 2012, 2013, and 2014 Security and Exchange Commission (SEC) filings, Peabody “denied its ability to reasonably predict the impact to its future business from any future law or regulation relating to greenhouse gas emissions generated from the combustion of coal, in order to address harms from climate change” (SA, p. 2). Actually, Peabody repeatedly acknowledged that climate policies could harm the coal industry, albeit in the cool, matter-of-fact manner typical of financial reports.
For example, Peabody’s 2011 Annual Report states: “Enactment of laws or passage or regulations regarding emissions from the combustion of coal by the U.S. or some of its states or by other countries, or other actions to limit such emissions could result in electricity generators switching from coal to other fuel sources” (p. 28). All the annual reports contain the same or similar caveats. See Appendix A, below.
Lest anyone suspect that Peabody tiptoes around climate change and speaks only in generic terms about “environmental” laws or regulations, the Annual Reports also contain fairly detailed summaries of developments in federal, state, and international climate policies. See Appendix B, below.
That, however, was not good enough for Schneiderman. Peabody conducted or commissioned “market projections about the impact of potential climate change regulatory actions” and found that some of those policies “could have a severe negative impact on Peabody’s future financial condition,” yet did not report the results of those analyses in its annual reports.
But such information would not provide any material facts shareholders don’t already know. Imposition of onerous restrictions on coal mining, coal-electric generation, and coal exports would obviously have a “severe negative impact on Peabody’s future financial condition.” That is not secret information but the very premise of the green war on coal.
Schneiderman (SA, p. 2) faults Peabody for claiming it is “not possible to reasonably predict the impact of any such laws or regulations may have” on the company’s “operations, financial condition or cash flows.” That statement, however, is entirely correct. If so-called progressive politicians (like Schneiderman) get their way, there won’t be a U.S. coal industry. But if progressives keep losing at the polls, the impacts of such laws or regulations could be small indeed. Public policy is a creature of politics, and politics is unpredictable.
Here’s language from the 2011 Annual Report that Schneiderman deems too imprecise:
Enactment of laws or passage of regulations regarding emissions from the combustion of coal by the U.S. or some of its states or by other countries, or other actions to limit such emissions, could result in electricity generators switching from coal to other fuel sources. The potential financial impact on us of future laws or regulations will depend upon the degree to which any such laws or regulations force electricity generators to diminish their reliance on coal as a fuel source. That, in turn, will depend on a number of factors, including the specific requirements imposed by any such laws or regulations, the time periods over which those laws or regulations would be phased in, the state of commercial development and deployment of CCS technologies and the alternative markets for coal. In view of the significant uncertainty surrounding each of these factors, it is not possible for us to reasonably predict the impact that any such laws or regulations may have on our results of operations, financial condition or cash flows [p. 31].
That is about as complete and balanced an assessment as one could possibly present in 2011, especially given the failure of the Copenhagen climate treaty conference in 2009, the death of cap-and-trade in 2010, and Democrats’ loss of their House majority in the 2010 mid-term elections, largely due to their support for cap-and-trade. That assessment arguably still holds given the dubious legality of EPA’s power plant rules and the “futility and farce” of the COP 21 climate treaty negotiations.
Schneiderman faults Peabody for commissioning a study in 2014 of the coal market effects of a $20 per ton carbon tax, but not publishing the results in its annual report (SA, pp. 2-3). But how does that qualify as an omission of “material” fact? Despite repeated urging from environmentalists, the Obama administration has declined to propose carbon taxes, and majorities in both the House and Senate have voted preemptively against carbon taxes. Why is Peabody legally obligated to publish assessments of policies with virtually no prospect of enactment?
Besides, many organizations conduct or commission studies of the economic impacts of climate policies. Such studies are controversial not only because they depend on multiple assumptions, but also because virtually all sponsors, whether private companies or regulatory agencies, are “stakeholders” — entities with a material interest in the battle over the policy analyzed. So to avoid what Schneiderman views as lies of omission, wouldn’t a company have to summarize all such studies if it reports the results of any single study? And not just for climate policy, but all tax and regulatory policies potentially affecting a company’s bottom line? Logically, Schneiderman demands that companies fill annual reports with gobs of useless and distracting wonky information.
Schneiderman objects that Peabody cited coal market projections in the International Energy Agency’s (IEA) “Current Policies Scenario” but not the agency’s New Policies and 450 Scenarios, and failed to identify the New Policies Scenario as the “central” scenario (SA, pp. 3-4).
The omission — if it is that — is not securities fraud under any reasonable criteria. The IEA is a credible estimator of how much coal will be produced and sold if market forces are allowed to operate within the constraints of current policies. No one is an expert in predicting what climate policies the world’s governments will adopt and when. What we do know is that 23 years of climate treaty negotiations have failed to stop the global boom in coal electric generation, and what we may reasonably expect is that Western nations will not pay developing countries $100 billion annually in climate assistance — their asking price for limiting emissions.
In a recent report on the COP 21 negotiations, Oren Cass of the Manhattan Institute concludes:
Fundamental economic and political challenges suggest that there is no plausible path to an agreement premised on collective action or compensation: developing nations that must bear the brunt of emissions reductions in any successful scenario cannot achieve those reductions while pursuing rapid economic growth; developed nations cannot sufficiently compensate developing ones for forgoing such growth. Evidence from recent negotiations, as well as preparations for the next round of talks, reinforces this conclusion.
Suppose Peabody said just that in its next annual report — what would Schneiderman do? Would he prosecute Peabody for viewing the prospects for IEA climate policy scenarios differently than he does? That may seem too ridiculous to contemplate. Yet that is in effect what Schneiderman has just done. The IEA’s New Policies Scenario (countries implement their “announced” climate policies) is optimistic rather than realistic and the 450 Scenario (“widespread adoption of expensive ‘net negative’ emission reductions technologies,” such as “bio-energy with carbon capture and storage”– IEA 2013) is pie-in-the-sky.
So what should Peabody say in future annual reports? Here’s my unsolicited advice.
(1) If the report must include estimates of the adverse impacts of specific climate policies or regulations on Peabody’s future financial condition, it should also include estimates of the adverse impacts on the U.S. economy. For example, the Heritage Foundation, using a clone of the Energy Information Administration’s National Energy Market System (NEMS) model, analyzed the impacts of climate policies that phase out coal-electric generation between 2015 and 2038. The study finds that by the end of 2023, U.S. employment falls by nearly 600,000 jobs, including 270,000 fewer manufacturing jobs. It also finds that over the entire period of analysis, a family of four’s cumulative income drops by nearly $24,000 and cumulative GDP is $2.23 trillion smaller than it would be absent such policies.
(2) If the report must include IEA or other policy scenarios that assume aggressive global efforts to decarbonize energy, challenge the realism of such scenarios. For example, in the COP 21 climate treaty negotiations, the European Union advocates a 60% reduction in global greenhouse gas emissions below 2010 levels by 2050. The U.S. Chamber of Commerce Institute for 21st Century Energy finds that meeting the 60-by-50 target would require developing countries to reduce their emissions 35% below current levels if industrial countries magically reduce their emissions to zero, and 48% below current levels if, less unrealistically, industrial countries reduce their emissions by 80%.
Billions of people in developing countries still have little or no access to modern commercial energy. Cutting their emissions 35%-48% below current levels by 2050 would be a humanitarian disaster. The so-called Green Climate Fund cannot pay developing countries enough to abandon access to affordable, reliable, scalable coal-based power. What is not economically-sustainable, is not sustainable.
Climate campaigners have been demanding for years that fossil-energy companies spotlight the risks their shareholders will face in a carbon-constrained world. But who created those risks in the first place if not the self-same politicians and activists who advocate cap-and-trade, carbon taxes, renewable energy quota, drilling moratoria, export bans, and other policies to bankrupt fossil-fuel producers? If they actually cared about shareholders (the idea is almost too absurd to entertain), they would disavow the policies of political plunder they have championed for so long.
Schneiderman threatens to prosecute — and thereby bankrupt — fossil-energy companies unless they rewrite their financial reports to scare away investors and, thus, bankrupt themselves. While launching this assault on shareholder value, he claims to be protecting shareholders. Schneiderman’s investigation is a gross “material” “misrepresentation.”
Appendix A: Annual Report language advising shareholders that environmental regulations could impact coal consumption and Peabody’s long-term economic projections.
On a long-term basis, our results of operations could be impacted by our ability to secure or acquire high-quality coal reserves, find replacement buyers for coal under contracts with comparable terms to existing contracts or the passage of new or expanded regulations that could limit our ability to mine, increase our mining costs or limit our customers’ ability to utilize coal as fuel for electricity generation [p. 20].
Enactment of laws or passage of regulations regarding emissions from the combustion of coal by the U.S. or some of its states or by other countries, or other actions to limit such emissions, could result in electricity generators switching from coal to other fuel sources [p. 28].
Enactment of laws or passage of regulations by the U.S. or some of its states or by other countries regarding emissions from the combustion of coal or other actions to limit such emissions, could result in electricity generators switching from coal to other fuel sources [p. 19].
On a long-term basis, our results of operations could be impacted by our ability to secure or acquire high-quality coal reserves, find replacement buyers for coal under contracts with comparable terms to existing contracts, competition from other fuel sources or the passage of new or expanded regulations that could limit our ability to mine, increase our mining costs or limit our customers’ ability to utilize coal as fuel for electricity generation. In the past, we have achieved production levels that are relatively consistent with our projections. We may adjust our production levels in response to changes in market demand [p. 42]
These forward-looking statements are based on numerous assumptions that we believe are reasonable, but are subject to a wide range of uncertainties and business risks and actual results may differ materially from those discussed in these statements. Among the factors that could cause actual results to differ materially are: . . .legislation, regulations and court decisions or other government actions, including, but not limited to, new environmental and mine safety requirements, changes in income tax regulations, sales-related royalties or other regulatory taxes and changes in derivatives laws and regulations [p. i].
Demand for coal and the prices that we will be able to obtain for our coal are influenced by factors beyond our control, including global economic conditions, the demand for electricity and steel, the impact of weather on heating and cooling demand and taxes and environmental regulations imposed by the U.S. and foreign governments [p. 9].
These forward-looking statements are based on numerous assumptions that we believe are reasonable, but are subject to a wide range of uncertainties and business risks and actual results may differ materially from those discussed in these statements. Among the factors that could cause actual results to differ materially are: . . .legislation, regulations and court decisions or other government actions, including, but not limited to, new environmental and mine safety requirements, changes in income tax regulations, sales-related royalties or other regulatory taxes and changes in derivatives laws and regulations [p. i].
Demand for coal and the prices that we will be able to obtain for our coal are influenced by factors beyond our control, including global economic conditions, the demand for electricity and steel, the impact of weather on heating and cooling demand and taxes and environmental regulations imposed by the U.S. and foreign governments [p. 9]
Appendix B: Summary of Peabody Annual Report discussions of national, state, and international climate policies.
The 2011 Annual Report devotes 232 words to Australia’s carbon pricing scheme (p. 30) and 109 words to carbon capture and storage (p. 31).
The 2012 Annual Report devotes 153 words to Australia’s National Greenhouse and Energy Reporting (NIGER) Act of 2007 and 313 words to country’s carbon pricing scheme (p. 17). It also devotes 879 words to “The Global Climate,” covering such topics as climate legislation in the U.S. Congress, EPA’s proposed greenhouse gas regulations, state and regional greenhouse gas regulatory programs, state renewable energy mandates, international climate treaty negotiations, and Australia’s carbon pricing and emission trading programs (pp. 18-19).
The 2013 Annual Report devotes 776 words to EPA’s Endangerment Rule, Greenhouse Gas Tailoring Rule, the D.C. Circuit Court of Appeals and Supreme Court cases on the Tailoring Rule and EPA’s PSD (Prevention of Significant Deterioration) greenhouse gas permitting program, EPA’s proposed carbon dioxide (CO2) New Source Performance Standards (NSPS) for coal-fired power plants, and EPA’s proposed, withdrawn, and re-proposed “Clean Power Plan” for existing fossil-fuel power plants (p. 15).
The 2014 Annual Report devotes 152 words to EPA’s CO2 NSPS rule for coal-fired power plants, 167 words to the “Clean Power Plan,” 421 words to the Supreme Court PSD for greenhouse gases case, and 152 words to other greenhouse gas regulatory litigation (pp. 14-15). It also devotes 790 words to “The Global Climate,” covering such topics as Australia’s carbon pricing scheme, state and regional greenhouse gas regulatory programs, state renewable electricity mandates, international development banks’ termination of financing for coal power plants, and international climate treaty negotiations (p. 19).
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