Court Dismisses Exxon Lawsuit over Climate Impact

A US court has dismissed a class action lawsuit that alleged Exxon Mobil and fiduciaries of its employee stock ownership plan violated their Employee Retirement Income Security Act (ERISA) duties because they knew, or should have known, that the company’s stock “had become artificially inflated in value due to fraud and misrepresentation.”

The plaintiffs are current and former employees of Exxon Mobil who were participants in, and beneficiaries of, the Exxon Mobil Savings Plan, in which the company’s stock represented the single largest holding with a value of approximately $10 billion.

The lawsuit claimed that Exxon failed to disclose that its reserves had become impaired due to the proxy cost of carbon, which incorporated the future effects of global climate change, thus making its public statements “materially false and misleading.” The plaintiffs also alleged that the defendants should have sought out those responsible for Exxon’s securities disclosures “and tried to persuade them to refrain from making affirmative misrepresentations regarding the value of Exxon’s reserves.”

The plaintiffs said the fiduciaries violated their duty to plan participants because they continued to invest in Exxon’s stock despite knowing the share prices were artificially inflated. The complaint said the plan purchased at least $800 million worth of Exxon stock during the class period, which was from November 1, 2015, through November 1, 2016.

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But the US District Court for the Southern District of Texas ruled against the plaintiffs, saying they failed to meet the pleading standards for a claim under ERISA of failure to prudently manage the company’s savings plan assets.

“The court cannot say that attempting to prevent Exxon’s alleged misrepresentations would have been so clearly beneficial that a prudent fiduciary could not conclude that it would be more likely to harm the fund than to help it,” wrote Judge Keith Ellison in his ruling. He added that the “complaint does not show that a prudent fiduciary could not conclude that remaining silent could have resulted in a drop in stock prices that would have done more harm than good to the plan.”

Ellison also emphasized that the court’s ruling “does not decide whether Exxon or any of its affiliates engaged in false advertising, concealed negative financial or environmental information, or contributed to climate change.”

Tags: ERISA, ExxonMobil, Lawsuits, Pension, Southern district of Texas, US District Court

Smart beta is in vogue as an investing style lately, with numerous new investment vehicles crowding into the space. And the big impetus appears to be smart beta’s superior ability to weather a rough market.

That’s the conclusion of a Brown Brothers Harriman study of exchange-traded funds (ETFs) specializing in smart beta, which also is known as fundamental investing. As the study pointed out, “Most (70%) of smart beta ETF users are searching for risk mitigation or volatility control, suggesting some may be positioning portfolios for a turbulent year in 2019.”

Smart beta substitutes metrics like dividend yield, earnings, and book value to come up with supposedly improved versions of the market value method, traditionally followed by stock indexes. The rap on the S&P 500, the mother of market cap measurement, is that the biggest winners tend to skew the index. And this tendency has been particularly acute over the past year, when Apple and other FANG stocks have dominated the S&P (pulling it up, then in December, yanking it down).

According to BBH’s analysis, investors once went for smart beta as a way to achieve alpha, or market-beating returns—but now they view this group as more of a defensive play.

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Not that they are forgetting about smart beta’s allure as a supposed alpha generator. Tellingly, one-third of the new investments in smart beta ETFs is flight money out of actively managed funds. Small wonder: Active funds have turned in yet another stinko performance trying to do better than the traditional S&P 500. This implies that these folks still thirst for above-market outcomes.

Then there is the fees question. While the BBH study didn’t cover this aspect, the fees for smart beta ETFs are about half of what actively managed funds charge. A late-2017 Morningstar study of the field found that smart beta ETFs averaged 0.37% in yearly fees. And as the research firm noted, the expenses are going down, so it doubtless is even more affordable today.

Another question is how well the smart beta products perform. Investment manager Barry Ritholtz, writing for Bloomberg Opinion, compared the Invesco FTSE RAFI US 1000 Portfolio, which follows a smart beta strategy, with the Russell 1000, from 2005 to last summer. He and his firm concluded that the smart beta product came out slightly ahead.

Nonetheless, smart beta—hey, the name itself is a big advertisement, which is why Morningstar prefers to call it strategic beta—has attracted a big following. Numerous fund houses have launched their versions. Say what you want, this is no mere fad.

Tags: ETFs, S&P 500, smart beta, Stocks