Contributed by Dr. Christophe Thibierge (Professor of Finance at ESCP Business School).
TotalEnergies just reported a record profit, 14 billion euros. What about the expected dividend – more than half of the profit? Where are the investments to reduce climate change and other externalities in a business that is 90% dependent on the exploitation fossil fuels?
On my blog, I provided a detailed analysis of classical finance and sustainability. But let’s put on our green glasses and look at the situation of TotalEnergies from the point of view of sustainable finance. This means that the company can live without the money if it pays a large dividend to shareholders. They feel that their investment needs have been met.
We can find some information on investments in the 664 pages of their Universal Registration Document 20201.
Capital expenditures were $11,6billion in tangible and intangible assets. This was offset by 13billion in depreciation or amortization, thereby reducing total fixed assets’ net book value. TotalEnergies claims 25% of those 11,6 billion are allocated to renewables and electric, without making any distinction between them. They state that by 2030, 15% of their sales would be electricity coming “mostly” from renewable energies, whereas 80% would still be oil and gas. The annual report shows that investments in renewables (mostly offshore wind and photovoltaic electricity) have grown to $2 billion per year in the past five years. It is expected that this figure will rise to $3 billion by 2021. 75% of the 35GW total capacity for renewable energy that is planned at the 2025 horizon would be generated by solar energy (compared with 10 GW in 2020).
Now, let’s broaden the notion of investment to encompass projects that meet any of the United Nations’ 17 Sustainable Development Goals, or ESG (environment, social, governance) criteria. The question is: Has TotalEnergies made enough sustainable investments? Indeed, this company could decide to invest massively – in proportion, not only in amount – in environmental policies: reduction of exploration – especially in the Arctic – and exploitation of fossil resources, major investment in truly renewable energies (not counting gas, then…) We can note that TotalEnergies uses the term “renewable” liberally in their annual report (530 occurrences), with such gems as “renewable diesel” or “sustainable aviation fuel” – no mention being made of the greenhouse gases emissions of those fuels so poetically named.
Another way would be to further develop the letter S in ESG – more inclusion and diversity, better parity in decision-making bodies, respect for local populations in exploitation areas. Finally, G for Governance: it is always good to increase the transparency of executive remuneration methods, the independence of board members – why not invite an NGO such as Reclaim Finance to the board? – and the rejection of local corruption practices.
These sustainable investments can be very profitable over the medium-to-long term. These investments would be more profitable in the short-term because they would lower the risk/return trade-off which is one of traditional finance’s pillars. Capital expenditures could actually reduce profitability in the short-term. However, if these investments result in a similar reduction of risks to the corporation (climate, local risks and reputational risks, lower employer appeal, etc.This could help to improve the risk-return ratio.
We could also leave behind the classic two-dimension risk-profitability trade-off and introduce a third dimension, with a risk-profitability-sustainability tripod. The question would not be whether to maximize profitability at a given level, but to optimize the three components. Some companies would still continue to give priority to profitability, but at least, their stand would be clear: “We choose to ignore sustainability issues in order to maximize profitability.” Shareholders would then react accordingly: the maximizers (following the risk-profitability trade-off) would all be in favor of this move, while the optimizers (tripod) would take the high road.
TotalEnergies – the heavyweight of the French CAC 40 Index and one of the seven “supermajor” oil companies – has been attracting increasing attention for years. It does have a few flaws: 30 years of actively challenging climate changes, financing authoritarian regimes, aggressive and aggressive exploration of natural areas that should be protected. However, the company is one of the top-rated companies in its sector based on ESG criteria. Some portfolio managers go so far as to say that TotalEnergies is the greenest of the oil stocks – please appreciate the oxymoron.
Where did this paradox come from? On the one hand, we know that fossil fuel producers are major contributors to greenhouse gas (GHG) emissions… But on the other hand, an investor will want to know which companies are the most virtuous in a given sector. TotalEnergies is “relatively” well-ranked within its sector.
Finally, there is perhaps a deeper reason for the focus on this group: even today, cities are designed for and around cars; the car, or the SUV, is still, for many, a synonym of social status; logistics are still massively based on road transport (“if you bought it, a truck brought it”), or airplane delivery. Oil is still a first necessity, but for how long?).
Let’s illustrate this with the yellow vests protests in France. The gasoline price hike, which was the initial stimulus to this movement, had a carbon tax. Paradoxally, a carbon tax can be one of the ways to reduce the impact of climate change (polluter pays principle).
Our relationship to oil is complex, especially in its human dimensions. Although many of us are aware that there are climate and biodiversity issues facing the planet, it can be more difficult to take actions when it has an impact on our consumption habits, or our leisure activities. While TotalEnergies may be on a dark road, this is also indicative of the dark side to our own choices.
Let’s end on a positive note. Despite its huge GHG emissions, TotalEnergies does not spend enough on ESG criteria. In absolute terms, however, the effort could be hundreds of millions (or even billions) of euro. If this company were to devote just 1% of its revenues to these projects – and we are talking about more than 2 billion dollars here – it would be good publicity, much better than the “greenwashing” campaigns that such companies now regularly bombard us with.
About the author
Christophe Thibierge is a professor in finance at ESCP Business School. He published “A practical guide to corporate finance”, the English counterpart of his best-seller “Comprendre toute la finance”. Prof. Thibierge is in charge of the “Financial Analyst” course and the “green CFO – sustainable finance” specialisation at ESCP Business School.