During the annual cycle, the Committee met in person three times in The Hague, the Netherlands, and on other occasions by teleconference. We held meetings with key Shell senior management and other personnel to discuss in detail Shell’s approach to sustainable development and its sustainability reporting.
In reviewing Shell’s 2012 Sustainability Report, the Committee concentrated on three main questions:
- Has Shell selected the most important topics for the report?
- How well has the report dealt with these topics and responded to stakeholder interest?
- Did Shell provide sufficient information and access for us to do our job effectively?
Our review did not include verification of performance data underlying the report, or the information on which the case studies in the report were based.
In addition to our comments on the company’s sustainability reporting, the Committee will meet with Shell’s Executive Committee in mid-2013 (as we did in 2012), to discuss our observations on the company’s strategy and sustainability performance.
In recognition of our time and expertise, an honorarium was offered, payable either to us individually, to our organisation, or to a charity of our choosing. We were also offered reimbursement for the expense of our travel and accommodation.
The External Review Committee (ERC or the Committee) is pleased to comment on Shell’s 2012 Sustainability Report. The ERC’s engagement with Shell in this reporting cycle began in October 2012 with multiple face-to-face meetings with members of Shell’s senior management and the Shell Board of Directors, including Chief Executive Officer Peter Voser and Chad Holliday, Chair of the Corporate and Social Responsibility Committee of the Board. The ERC and Shell management next met in January 2013, when the ERC had a chance to provide its reaction to the first draft of the report.
As with previous years, the engagement process was well designed, and Shell managers were open and informative. The ERC thanks the Shell reporting team and senior management for a unique opportunity to understand Shell’s sustainable development activities, challenges and outlook.
The purpose of the ERC’s extensive engagement with Shell management is to enable us to understand Shell’s operational context sufficiently so that we can provide informed comments on Shell’s Sustainability Report and the company’s sustainability performance. We do not act as verifiers of information presented in this Report. (See box above for more detail on the ERC’s role and relationship with Shell.)
This letter contains our opinions on Shell’s 2012 report. We will meet with Shell’s Executive Committee in June 2013 to share our views on the company’s sustainability performance.
Overall report quality
The ERC is of the view that the 2012 report presents the material environmental and social challenges that affect Shell’s business performance and are of interest to its key stakeholders. The report provides a thorough account of Shell’s business activities, with focus on safety and responsibility. It presents Shell’s environmental footprint data and some social performance information in a manner consistent with this responsibility theme, though the Committee would have liked more commentary on performance data throughout the report. The ERC notes that the report uses external opinions effectively to illustrate both progress and challenges. The 2012 report incorporates a number of new features, some in response to feedback from the ERC.
Sustainable development strategy and climate change
The ERC understands the core of Shell’s strategy on sustainable development is to use innovation and technology to deliver cleaner energy – through natural gas, carbon capture and storage (CCS), biofuels and energy efficiency.
The ERC commends the action Shell took in 2012 toward CCS and appreciates the expanded explanation of Shell’s approaches to operational energy efficiency in this year’s report. Shell’s position on climate change would command greater public confidence if Shell could more fully explain how it applies its $40 a tonne carbon shadow price. Shell could also clarify how it reconciles the differences between the clear public positions it adopts on climate change, for example by advocating for market mechanisms and a price on carbon, with the positions adopted by some industry organisations to which it belongs. Beyond these observations, the ERC continues to feel that Shell’s activities in these areas should be presented as part of a more coherent long-term strategy to address climate change, believing this would provide necessary context for its stakeholders to understand Shell’s overall sustainable development strategy.
This year, the ERC had an opportunity to better appreciate Shell’s approach to technology and innovation, and how they connect to its long-term view on climate change and future challenges. Given the central role they play in Shell’s approach to sustainable development, the Committee looks forward to additional material on technology and innovation in future reports.
Risk and complexity
The Committee recognises that Shell’s need to replenish its reserves means that it is seeking them in increasingly challenging areas, such as deep oceans and the Arctic, and from sources such as oil sands. In the 2011 report, the ERC identified some tensions between Shell’s desire to develop reserves in environmentally and socially sensitive locations and its ability to manage risks from these operations. The ERC in turn asked for a more robust treatment of the operational challenges and Shell’s approach to anticipate, identify and manage risks.
The 2012 report describes these tensions, risks and complexities more fully through its use of case studies and “Focus” stories. The report offers a sobering account of the serious challenges that Shell faces in Nigeria. The detailed treatment of the Arctic, the Kulluk incident and Shell’s acknowledgement of operational shortcomings in Alaska in 2012 provide a balanced account of the situation, and the Committee anticipates further analysis and reflection in next year’s report. Given the concerns about these and other operations in sensitive locations or challenging circumstances, future reports might be more specific about lessons learned, and how they are translated into actions and systematically implemented and monitored across the company.
The 2012 report provides detailed coverage on tight/shale gas and oil, which is helpful for stakeholders. Shell has pushed for transparency of information on the chemicals used in fracking, which sets Shell apart from others. Nonetheless, the ERC wonders whether the report sufficiently acknowledges communities’ concerns about fracking, particularly with regard to potential impacts on air and water. Shell is working to better understand these impacts and has published a set of operating principles designed to raise industry standards. Considering the uncertainties around cumulative impacts and fugitive emissions of methane, however, Shell’s assertions that its technologies are safe are not likely to fully address communities’ concerns without further research, monitoring and reporting.
This year’s report contains a section on how Shell works with its joint venture partners, contractors and suppliers. Due to the ever-increasing attention on how extractive companies manage governance risks, the explanation of how the Shell Control Framework applies to ventures with Shell’s involvement is very welcome, and the ERC encourages Shell to generate additional materials on this theme in future reporting.
Social performance and investment
In the last report cycle, we understood that new social performance metrics were being developed in 2011 and would be implemented in 2012, and that a new social performance strategy would be forthcoming. The Committee also looked forward to learning about the progress in establishing additional grievance mechanisms for new projects. These items were not included in the 2012 report.
Shell acknowledges that its operations are potentially more vulnerable to above-the-ground or non-technical risks than below-the-ground or technical risks, and that social performance is key to managing above-the-ground risks. Considering the materiality of such risks, the ERC hopes that Shell will move forward on social performance and include more information about this in future sustainability reports.
For the first time, this year’s report includes a breakdown of Shell’s social investments, which helps readers understand the types of investments made. It would be important for Shell and its stakeholders to know that the investments are having the desired impacts on communities. Shell could benefit from completion, publication and proactive application of its social investment strategy, which would not only guide the prioritisation of its social investments at local and global levels, but would also help articulate the impacts, as well as enhance the sustainability, effectiveness and efficiency of these investments.
While acknowledging the high quality of Shell’s sustainability reports, which distinguishes Shell among its peers, there is a growing desire on the part of the ERC to see more strategic context and content in these reports. The Committee would like to see a more comprehensive presentation of Shell’s vision, strategy and metrics for sustainable development in a world facing climate change, growing energy demand, and continuing concern about environmental and social impacts. It is clear from our engagement with Shell that its management and reporting team can take the company’s sustainability reporting to a new level of excellence.
The ERC now looks forward to engaging with the Executive Committee to continue its dialogue on Shell’s sustainability performance.