In the past couple of weeks, announcements of energy company 2022 earnings, many eclipsing previous profit records, have raised considerable attention, discussion, and in some corners, outright backlash. Somewhere along the way, working hard, controlling costs, competing in challenging global energy markets, and still earning profits has made these companies pariahs. As a consequence, their results require an inordinate, time-consuming, and expensive amount of public and investor relations activity to communicate the importance of their work and the results they have achieved.
Largely driven by public officials who have determined they can leverage the stellar results as somehow ill-gotten gains, the vitriol is delivered without much thought or reference to the products, services, and benefits these companies alone can, and must continue to provide – including those that some public officials have even encouraged them to provide.
The reaction we’ve seen exhibited does not bode well in the decades ahead. Our world continues to grow, and with it, its energy needs. As I’ve written previously, the concern and simple reality we face is that the fossil fuel companies, and their products and services, will be needed for years to come. They must be positioned to continue to provide the energy required to support domestic and global economic growth and rising standards of living. And they must do this while making what will be a very long investment and development transition to the low carbon energy solutions that are necessary to attain established net-zero objectives.
To do their work, publicly held companies in the energy sector depend on investors. Their investments provide the capital to fund the research and development essential to making the energy transition we must achieve, and they must be sustained. Even so, those investments are challenged as Environmental Social and Governance – ESG – principles play a growing and decisive role, internationally, as a wide range of stakeholders engaging in portfolio analysis weigh the profitability and returns of the energy companies against other investment options. As investment decisions are made, they ultimately affect portfolio returns and even the costs and allocation of available capital. In fact, Bloomberg Intelligence research suggests that although ESG is still in its relatively initial stages of evolution global ESG assets may reach $50 trillion by 2025, one-third of the projected total assets under management globally, which given the scope, places companies, especially those in the energy sector, under added scrutiny.
Given the level of scrutiny, challenges to the profitability of the energy companies will remain unjustified. Substantial evidence supports the fact that energy companies are among the most consistent investors in much needed advanced energy technologies including, among others, renewable fuels and carbon capture and storage. They balance those investments with ongoing exploration, production and supply of todays energy resources, all of which are also capital intensive and necessary to maintain commerce, lives and livelihoods, and economic growth. Both investment tracks will require billions of dollars of investment and the ability to manage costs, while continuing to attract and retain investors. To do that, these companies, not unlike those in many other industries, reward investors with dividends in return for their investment and confidence in their work. Detractors need to remember that the payment of dividends is derived from profits after tax, and that the dividends that are paid are further taxed at either regular income tax rates or under capital gains provisions to the recipients. That so-called double taxation provides important sources of revenue to federal, state, and local governments.
Additionally, as researched and reported by Dr. Pinar Cebi Wilber, Executive Vice President and Chief Economist for the American Council for Capital Formation, the importance of dividends as a safe stream of income for retirees must also be kept in mind. Retirees holding a share of their retirement savings in dividend-paying stocks not only allows them to increase their savings, but also protects them against inflation and the need for access to costly assistance programs. The IRS numbers highlight the importance of dividends for retired taxpayers and those nearing retirement. In tax year 2018, taxpayers over fifty-five, accounted for 60% of tax returns with qualified dividends, and nearly 80% of all qualified dividends ($193 billion) were paid to this group.
Finally, while helpful and absolutely necessary, government funding alone has never been, or will be, adequate enough to meet the levels of sustained investment required for long-term energy transition needs. Chastising and maligning the energy sector is not only detrimental to energy transition and climate objectives, but it also undermines confidence in the sector best positioned to employ and invest any available government funding in conjunction with their own capital spending plans. Therefore, all parties involved must be honest with themselves and understand that their collective interests are best served if both the expertise and financial resources of today’s energy sector, which is already intent on meeting investor-directed climate and ESG principled goals, continues to be supported.
Simply put, while the financial performance of energy companies will ebb and flow, their profitability pays dividends….in many important ways.
Mike Roman is Senior Fellow, Public Policy/ESG at the American Council for Capital Formation.