Exposing a Ticking Time Bomb: How Fossil Fuel Industry Fraud is Setting Us Up for a Financial Implosion – and What Whistleblowers Can Do About It

Exposing a Ticking Time Bomb: How Fossil Fuel Industry Fraud is Setting Us Up for a Financial Implosion – and What Whistleblowers Can Do About It

Recommendations for whistleblowers and law enforcement authorities to protect investors, the environment and the economy

Published July 2020

Download the PDF version of the report here.

Executive Summary

In the past several years, U.S. states, cities, counties and individuals concerned about climate change have filed important lawsuits against fossil fuel companies, asserting that the companies are responsible for climate-related damage due to their carbon pollution. These cases confront “what might be the greatest scam in history,” in the words of historian Naomi Oreskes: the massive disinformation campaign designed to stall action on climate change by persuading decision makers and the public that it is not a problem to be taken seriously.

In this report, the National Whistleblower Center focuses on a related deception that, with a small handful of notable exceptions, is unaddressed in the climate change lawsuits filed to date: the dramatic understatement of risks posed by climate change to fossil fuel companies’ own financial condition and to the economy at large. We describe an important pathway to ensuring proper disclosures of climate risks: collaborative work by whistleblowers, prosecutors and regulators to enforce anti-fraud laws.

This report is a call to action for executives of fossil fuel companies and others with knowledge of improper accounting and disclosure practices, such as external auditors, to take the steps needed to obtain protected whistleblower status and work with the SEC, other regulators and law enforcement officials to help expose and prosecute fraud. For the first time, we offer legal strategies for whistleblowers and others to expose and prosecute climate risk fraud in the fossil fuel industry. This is also the first report to use the methods of professional fraud investigators to identify fossil fuel industry financial disclosure practices that are likely to be fraudulent.

Climate risks—comprised of “transition risks,” the financial risks to some companies due to the world’s shift away from fossil fuels, and “physical risks,” those associated with climate change-related damage to property— uniquely threaten the finances of fossil fuel companies. Fossil fuel companies, fearful of losing access to investment capital and loans, are therefore highly motivated to conceal their exposure to these risks.

Concealment of climate risks is a matter of great public interest because when it is successful, it harms investors, the environment and the economy. Investors who provide capital to these companies suffer because they invest based on a false sense of the companies’ readiness for the transition to a low-carbon economy and for the physical shocks of climate change. This deception undercuts efforts to address climate change because it slows the shift of investments to businesses developing and deploying low-carbon technologies. It harms the economy by leaving financial institutions such as banks and insurers less prepared for the stresses of rapid asset deflation.

This last type of harm deserves special attention. The potential for rapid asset deflation at large fossil fuel companies is a ticking time bomb that, if not detected and addressed, could make the global financial system implode. This is because banks, insurers and other globally significant financial institutions are heavily invested in these companies and may not be able to withstand the stresses of simultaneous company failures. Numerous companies and industries are also linked to the financial condition of fossil fuel companies, posing a danger that simultaneous collapses of fossil fuel companies will reverberate widely across the economy, destroying countless jobs and livelihoods.

This systemic risk, which threatens many more people than just the shareholders of fossil fuel companies, has put climate change at the center of the agenda of the world’s financial regulators, investors and asset managers. In June 2020, the central banks of 66 nations warned that, without aggressive action to reduce carbon emissions, global Gross Domestic Product will fall 25 percent by the end of the century.  In July 2020, financial institutions that together manage almost $1 trillion in assets wrote to the Securities and Exchange Commission (SEC) and other U.S. financial regulators warning that the “systemic threat” of climate change means “significant disruptive consequences on asset valuations and our nation’s economic stability” as well as “the lives and livelihoods of tens of millions of people across the country.” Both documents call for regulators to mandate that companies provide robust and consistent disclosures of the climate risks facing them.

Although a number of companies with large fossil fuel investments such as Shell and BP have agreed on the need to shift to an economic system not dependent on carbon emissions and have even pledged to achieve “net zero” emissions by mid-century, the National Whistleblower Center’s analysis of public statements by these and other exploration and production companies reveals that material information on climate risks is being deceptively omitted. Further investigation by whistleblowers and law enforcement officials is needed to determine whether this deception constitutes legally actionable fraud.

In a new approach to climate risks, NWC looks at fossil fuel companies through the skeptical lens of a fraud investigator using “fraud triangle” analysis, which considers incentives, opportunities and rationalizations to commit fraud.

We find that a vast array of deceptions about climate risk are underway in the fossil fuel industry. These deceptions generally fall into three categories:

• Overstating the value of reserves
• Understating environmental liabilities
• Understating physical risks to infrastructure

A small number of pending legal actions allege climate risk deceptions by one fossil fuel company, ExxonMobil (Exxon), the world’s largest publicly traded oil and gas company. A climate risk fraud case has been filed by the Commonwealth of Massachusetts against Exxon, shareholders have filed similar cases in federal courts in Texas and New Jersey, and a group of whistleblowers has filed a complaint against Exxon with the SEC. The Massachusetts case is particularly significant because it alleges misleading statements and omissions by Exxon about climate risk that we find are pervasive in the industry.

NWC’s analysis of these and other cases dealing with climate change, corporate fraud and whistleblowers shows these cases are likely just the tip of the iceberg.  We anticipate that the number of cases and defendants will likely increase dramatically in the near future once potential whistleblowers learn about the benefits of modern whistleblower laws and begin providing information to regulators and prosecutors about the variety of climate risk deceptions outlined in this report.

Whistleblowers have long played a central role in exposing frauds and ensuring successful government investigations and prosecutions. In the tobacco, banking and health care sectors, for example, they are credited with producing major legal precedents and industry reforms. Their contributions to global efforts to combat private sector corruption have dramatically increased since U.S. whistleblower laws were first modernized with the 1986 amendments to the False Claims Act. More than US$2 billion in monetary sanctions have been imposed, and more than US$500 million in whistleblower awards  paid under the Dodd-Frank Act alone. Prosecutors and regulators of all political affiliations strongly support these laws because they know that without whistleblowers, a large percentage of law enforcement actions would be unsuccessful.

The key to the success of modern whistleblower laws in the U.S. has been protections and incentives. Presumably, many executives at fossil fuel companies or auditing firms are witnessing frauds, and some are experiencing moral outrage. But corporate executives have voiced legitimate fears that one can blow the whistle without experiencing retaliation, sacrificing one’s job and losing any ability to find a job within the industry.

Under these laws, anyone with original information about a potential crime can confidentially disclose such information to law enforcement authorities. If the whistleblower’s identity becomes known, retaliation is strictly prohibited. If the information provided to law enforcement contributes to the recovery of monetary sanctions, they are guaranteed a share of these monetary awards based on the extent to which their information contributed to the successful prosecution. These laws facilitate prosecutions and civil actions against virtually any company doing business in the U.S., regardless of whether the company is U.S.-based. Confidentiality and monetary awards may be provided to whistleblowers regardless of location, citizenship or employment status.

Although improvements to climate risk disclosure rules and whistleblower laws are needed in the U.S. and around the world, the existing U.S. whistleblower legal regime offers great promise for producing near-term results in the battle against climate fraud by fossil fuel companies.

At the conclusion of this report, we recommend enforcement actions that can be taken today by potential whistleblowers, law enforcement officials and others to address climate risk fraud. We also recommend actions that policy makers and others can take to assist whistleblowers and otherwise improve the disclosure of climate risks by fossil fuel companies.

Key Findings

1. Deception about the financial risks climate change is pervasive across the fossil fuel industry. Two categories of material information are routinely omitted from companies’ statements to shareholders:
   • The immediate risks that climate change poses to companies’ financial condition.
   • The risk that the company’s asset deflation will contribute to an economy-wide financial implosion
2. The growing role of whistleblowers in the fight against fraud means the handful of pending securities fraud cases challenging these deceptions represent just the “tip of the iceberg.”
   • There are just five pending cases – all against Exxon – seeking judicial or administrative rulings on whether a company’s statements on the financial risks of climate change constitute securities fraud under state or federal law.
   • The number of cases and defendants will likely increase dramatically once potential whistleblowers learn about the protections and rewards offered by modern whistleblower law and provide detailed information about climate risk fraud to regulators and prosecutors.
3. Whistleblowers in the fossil fuel industry, like their predecessors in the tobacco, banking and healthcare industries, can play a central role in industry reform and help prevent a worldwide financial implosion.

Recommendations:

• Potential whistleblowers:
  • Educate yourself about whistleblowing and how to secure legal counsel; NWC’s website offers helpful resources
  • Speak with a whistleblower attorney before using internal corporate compliance programs
  • Learn how to protect yourself against retaliation through confidential disclosures of wrongdoing and how to secure awards

• Law enforcement officials and regulators in the U.S. (federal and state) and abroad:
  • Launch investigations under securities laws and other corporate governance laws into fossil fuel companies’ handling of climate risk
  • Work closely with whistleblowers as confidential informants in detecting potential frauds and carrying out investigations
  • When fraud is found, secure meaningful monetary sanctions (and where appropriate, prison sentences) to deter future frauds of the same type

• Fossil fuel industry directors and officers:
  • Fully disclose climate change risks in accordance with legal requirements governing communication of material risks to shareholders
  • Update corporate compliance programs to provide anonymous and confidential channels for whistleblower reporting in accordance with the Sarbanes-Oxley Act
  • If you are aware of fraudulent behavior, consider becoming a whistleblower

• Executive branch policy makers in the United States (federal and state) and abroad:
  • Craft climate risk disclosure rules, requiring consistent, comparable and specific information on how companies are addressing both transition risk and physical risk
  • Include whistleblower protections in all climate risk disclosure rules
  • Create and strengthen programs at regulatory bodies that educate potential whistleblowers about protections and incentives

• Legislatures in the United States (federal and state) and abroad:
  • Direct regulatory bodies to promulgate climate risk disclosure rules and include whistleblower protections
  • Provide funding for whistleblower-assisted investigations
  • Address systemic risks of climate change to the financial system

• Everyone who supports positive action on climate change:
  • Join NWC’s action network, through which our supporters engage in effective advocacy before key decision makers
  • Persuade policy makers in the U.S. (federal and state) and abroad to:
    • Strengthen whistleblower protections
    • Prioritize funding for whistleblower-assisted climate fraud investigations
    • Strengthen climate risk disclosure rules

Additional Resources:

• Combat Corruption in the Fossil Fuel Industry
• High profile cases in industries with a high risk of fraud
• High Risk Industries

Read our press release here.

Download a PDF version of this report here.

To read about whistleblower laws in more depth, read The New Whistleblower’s Handbook, the first-ever guide to whistleblowing, by the nation’s leading whistleblower attorney. The Handbook is a step-by-step guide to the essential tools for successfully blowing the whistle, qualifying for financial rewards, and protecting yourself.