Tuesday

6th Dec 2022

Opinion

One idea to tackle Big Energy's big profits

  • Second-quarter results show Shell, Centrica, Exxon, Chevron and other large energy companies have made record profits (Photo: Images_of_Money)
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Recently published second-quarter results show that Shell, Centrica, Exxon, Chevron and other large energy companies have made record profits. They intend to pay these profits out to their shareholders.

Scepticism towards such high dividend payouts is increasing, particularly at a time when the planet is further spiralling into irreversible climate change and European citizens are struggling with a cost of living crisis. One solution for distributing the profits made from the energy crisis more equally are windfall taxes.

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  • Shell and other energy giants pay out outsized dividends to their investors, making their green investment pool smaller (Photo: Wikimedia)

The calls for such tax measures are getting stronger in several countries, yet they might be hard to pass in many others.

Another approach besides taxing excess profits, is to mandate large energy companies to invest their profits in their own sustainable futures.

After all, these companies have a large 'sustainability debt' and extraordinary transition costs awaiting them.

Today, however, they pay out outsized dividends to their investors, making their green investment pool smaller while providing hard incentives to investors to buy into these dirty energy enterprises, which remain the most profitable globally. It is time for big companies to take the necessity of their sustainability transition seriously and use their profits to pay for it.

Concretely, the European Union and its member states should require companies to make financial reserves for their sustainability transition. European polluters, including subsidiaries of international groups, should annually reserve money in a legally-required 'transition reserve'. This yearly-refilled transition reserve should be set in relation to company-specific transition plan.

The EU will soon introduce a requirement for large companies to make transition plans as part of the Corporate Sustainability Reporting Directive and the Directive on Corporate Sustainability Due Diligence.

The current proposals, however, do not require companies to outline the costs of the transition or set any boundaries to dividend payouts.

The EU legislator should require large companies to include step-by-step transition investment projections into their transition plans, which would set out the estimated cost of their transition and determine a yearly investment plan.

The target companies should then be required (via EU or national law) to create financial reserves to cover these transition costs. Importantly, until sufficient reserves have been made to cover the costs for (at least) the next several years, the companies should not be able to make distributions to their shareholders.

Not a tax measure

A transition reserve secures the energy companies' sustainability transitions, putting the money where their mouth is. It gives the European sustainable corporate governance proposals financial footing — without being a tax measure. No money flows to the government with this proposal. The transition reserve remains part of the company's own resources and is used for investments in its own sustainable future.

There are several further advantages to this proposal.

The transition reserve creates a new perspective on how companies should manage their resources, translating the necessary long-term perspective into actual financial commitments.

In addition, the transition investment plans and reserves both support the European sustainable finance agenda, insofar that they increase transparency towards investors who need to be aware of the real costs of the transition.

Finally, the transition reserve also lowers the moral hazard for large polluters that may be considered 'too big to fail' and thus could bet on governments to bail them out at the end of the day.

By making transition plans and reserves for large polluters mandatory, the European Union can take a significant step towards achieving climate goals, while easing the pressure on Europe's taxpayers.

In the long term, not only citizens, governments, future generations and our ecosystems will benefit from more sustainable companies, but also the companies and their shareholders themselves.

Author bio

Marija Bartl is professor of transnational private law at the University of Amsterdam, where Nena van der Horst is PhD researcher in corporate governance.

Disclaimer

The views expressed in this opinion piece are the author's, not those of EUobserver.

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