An idea to tackle the big profits of Big Energy

Recently released second quarter results show that Shell, Centrica, Exxon, Chevron and other major energy companies made record profits. They intend to return these profits to their shareholders.

Skepticism about such high dividend payouts is growing, especially at a time when the planet is sinking deeper into irreversible climate change and European citizens are grappling with a cost of living crisis. One solution to distribute the profits from the energy crisis more equitably are windfall taxes.

  • Shell and other energy giants are paying outsized dividends to their investors, shrinking their pool of green investments (Photo: Wikimedia)

Calls for such tax measures are growing louder in several countries, but they may be difficult to push through in many others.

In addition to taxing excess profits, another approach is to force large energy companies to invest their profits in their own sustainable future.

After all, these companies have a large “sustainability debt” and extraordinary transition costs ahead of them.

Now, however, they are paying outsized dividends to their investors, shrinking their pool of green investments while providing a strong incentive for investors to invest in these dirty energy companies, which remain the most profitable in the world. It’s time for big business to take the need for their sustainability transition seriously and use their profits to pay for it.

Concretely, the European Union and its Member States should require companies to set up financial reserves for their sustainable transition. European polluters, including subsidiaries of international groups, should set aside money annually in a legally required ‘transition reserve’. This transition reserve, renewed each year, must be established according to the company’s specific transition plan.

The EU will soon introduce a requirement for large companies to develop transition plans under the Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive.

The current proposals, however, do not require companies to describe transition costs or set limits on dividend payments.

The EU legislator should oblige large companies to include in their transition plans step-by-step transition investment projections, which would establish the estimated cost of their transition and determine an annual investment plan.

Target companies should then be required (via European or national law) to create financial reserves to cover these transition costs. It is important to note that until sufficient reserves have been built up to cover costs for (at least) the next few years, companies should not be able to make distributions to their shareholders.

Not a tax measure

A transition reserve secures sustainable transitions for energy companies, putting the money where their mouth is. It provides a financial basis for European proposals on sustainable corporate governance, without being a fiscal measure. No money is going to the government with this proposal. The transition reserve is part of the company’s own resources and is used for investments in its own sustainable future.

There are several other 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 real financial commitments.

Moreover, transition investment plans and reserves support the European sustainable finance agenda, as they increase transparency towards investors who need to be aware of the real costs of the transition.

Finally, the transition reserve also reduces moral hazard for big polluters who may be considered “too big to fail” and therefore could bet on governments to bail them out in the end.

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

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

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