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Exxon investigation: A tipping point on climate risk

Fossil fuel companies and their advisers have been warned that they need to take climate risk into account, following reports of a probe into Exxon’s accounting.

It follows suggestions that Exxon is facing an investigation by the US Securities and Exchange Commission (SEC) into how it has accounted for assets during the recent oil price slump and over its estimates of climate change risk.

Alice Garton, lawyer at ClientEarth said, said: “Fossil fuel companies and their professional advisers should take this development very seriously. We’ve reached a tipping point on litigation risk associated with climate change.

“Corporate reporting of these risks to the market is required under existing laws. Companies and advisers must take climate risks into account in their decision making, or face being hauled before regulators – or the court.”

Alice said the Exxon development was “hugely significant” and had implications much further afield than just the US oil giant, because the SEC is also reported to have sought information and documents from Exxon’s auditor, PricewaterhouseCoopers.

“This may also signal the opening of a new front in climate-related regulation and enforcement at the SEC, against fossil fuel companies and other carbon intensive sectors,” said Alice Garton

“If true, it has liability risk implications for auditors who sign off on annual reports without adequately considering the business risks associated with climate change.

“This development is a signal that US regulators are taking climate risk seriously and other regulators around the world should follow suit. In the UK this means the Financial Reporting Council needs to get tough on corporate reporting on climate risk.”

Last month, ClientEarth alerted the FRC, the UK financial regulator, to reporting breaches by two oil and gas companies. The international environmental law group believes both companies have failed to adequately disclose climate change risks to their businesses.

In detailed legal letters to the Financial Reporting Council (FRC) ClientEarth  requested intervention to correct defective reporting by SOCO International Plc and Cairn Energy PLC.

Both make scant reference to climate-related risks to their business in their annual reports. This means investors are not fully informed of risks to the business.

In the UK, the Companies Act 2006 sets out a legal framework for companies to report material risks to the business. The FRC is the regulator responsible for monitoring compliance with relevant reporting requirements.

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