First of all, we want to acknowledge and commend the significant progress Shell has made with regard to reporting and transparency. The report has improved in terms of content, design, readability and responsiveness to external inputs, including from the ERC. Most importantly, it more clearly identifies the most material issues relating to Shell and its sustainability performance.
The process by which the ERC engaged with Shell´s most senior leaders has been effective and informative, allowing the Committee to be exposed to Shell’s strategic thinking. The ERC explored Shell´s challenges and dilemmas with Ben van Beurden (Chief Executive Officer) and Board member Charles O. Holliday, among others. It is clear that understanding the external world´s expectations and their impacts on the company´s long-term strategy is of utmost importance to Shell. The ERC believes these conversations and Shell’s overall disposition towards engagement contribute to the mapping of the non-technical risks it faces.
The energy transition
The CEO letter at the start of the report sets the tone by clearly outlining the energy dilemma the world is facing: how to provide safe, affordable and reliable energy to a growing and increasingly urbanised population while reducing carbon emissions. It also explores the role of an energy company in this transition to a lower-carbon economy, addressing implicit questions including: should Shell lead through effective advocacy of public policy, in collaboration with other stakeholders? Or is it a follower, responsible for delivering the energy mix determined by the policy framework?
The ERC recognises the difficulties the sector faces and understands that by illustrating dilemmas in a transparent way, Shell is contributing to a clearer understanding of possible trade-offs. In the ERC’s opinion, the uncertainties faced by the oil and gas industry in our increasingly turbulent world are more pronounced than in the past, aggravated as they are by the significant decrease in the price of oil, by political instabilities in key energy producing regions, and by climate change disruption, among other acute and chronic stresses.
Shell´s increasing investment in gas (which comprises more than 50% of its portfolio), work on biofuels, leadership on and advocacy for carbon capture and storage (CCS) and continuous focus on operational energy efficiency are welcome steps as part of the transition to lower carbon levels. Shell’s investment in future technology research and development (such as in advanced biofuels and hydrogen) are also necessary and important for matching energy demand with lower carbon alternatives. We encourage Shell to provide more insights on the impacts of research & development capital expenditure in accelerating lower-carbon solutions. Public information in this domain is important to signal the level of commitment of the company to helping bring about a low-carbon future.
The ERC acknowledges the importance of Shell’s use of a shadow carbon price of $40 a tonne for new projects, which is both prudent internal practice and a recognition that societal expectations and/or regulation may increase the cost of emitting. The ERC reaffirms the importance of Shell´s senior leadership continuing to advocate for clear public policies that foster investments in a broad range of lower-carbon alternatives, including effective carbon pricing.
While the report explains Shell´s present strategy in the context of the energy transition, it does not yet present a long-term vision with goals that make clear how Shell envisions its future role. Are future energy solutions including renewables perceived as a threat to Shell´s business model or does Shell welcome and support the future they herald? How and in what time frame will Shell capital investment evolve from today´s fossil fuel predominance? Additionally, the ERC would like to see Shell disclosing how the energy transition will further impact the company’s business strategy, influence its targets and determine its future actions.
Ongoing challenges
ERC overview
The Committee met in person twice 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 the 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 reporting, we separately provided Shell with 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.
As society´s concern over drilling in the Arctic is so substantial and widespread, it is very difficult to adequately address within a single written report. The ERC acknowledges the description of the extensive local community engagement Shell is undertaking in the Arctic, as well as the ways in which it is working to be technically prepared for exploration. Shell has said that it is incorporating many non-technical aspects in its decision-making at the same time as substantially increasing its ability to operate in this unique and ecologically sensitive environment.
That said, the ERC does not find the report adequately addresses these material issues, nor does it present a convincing argument for why it is important for Shell to have a presence in the Arctic.
In Nigeria, Shell´s efforts to reduce theft and sabotage are clearly described in the report and demonstrate the company´s commitment to improve operational standards, even in a challenging context. The ERC encourages Shell to further disclose its progress in this area, allowing stakeholders to assess company progress towards achieving its goal of no harm and no spills from its operations.
Another area of concern for the ERC is the report’s disclosure of significant increases in flaring at Shell operations in Iraq, Nigeria, Qatar and Malaysia. Although the report states that Shell has a policy forbidding flaring at new facilities, it does not adequately explain why Shell tolerates so much flaring. There are several projects described in the report that are planned to reduce flaring. The ERC urges Shell to provide clear progress reporting on those projects to reassure external stakeholders that its approach to flaring is consistent with its reported policies.
In the case of methane fugitive emissions, the ERC welcomes the level of disclosure present in the report with respect to methane leakage levels. Nonetheless, the ERC believes the report should more clearly describe how Shell’s emissions compare to the studies performed, and the plans Shell has in place to reduce its methane emissions.
Social performance
Social performance strategy and implementation has been an area of concern to this Committee for several years. In that context, the ERC wants to acknowledge Shell’s progress in this arena. The report describes more clearly than ever before how Shell considers and aligns with international standards and frameworks. It is also much clearer on Shell’s own social performance principles and approaches, for example, to stakeholder engagement, and it illustrates how the company monitors social performance at a local level.
There is still more work to be done in the area of social performance indicators and outcomes measurement, and we look forward to continued progress in this area. We welcome the more strongly articulated commitment to sharing baseline data and assessment studies with local communities in this year’s report, and note that there is scope for further strengthening of such feedback mechanisms as well as for better documentation of how they affect project design and implementation.
Accelerating collaboration
The report makes clear that Shell believes the company needs to deploy consistent ongoing effort to collaborate with different stakeholders to be part of the solution to the energy dilemma. The ERC welcomes the initiatives explored in the report, such as how Shell engages with local governments and communities in China, which illustrates how the company collaborates beyond industry.
The ERC has long urged Shell to press harder for the necessary policy frameworks of regulatory and fiscal rewards and punishments to support companies in making the required transition to a lower-carbon world, and we are pleased that this theme has been taken up by the CEO and included in his opening letter. In this context, the ERC looks forward to reading more about how Shell is exploring broader partnerships with other types of organisations, both industry associations and civil society where appropriate, to influence governments to act on their responsibilities to shape markets appropriately.
Although the dilemmas faced by the company around whether to remain in some industry bodies are described, the ERC does not find this aspect of the report adequately convincing, especially given that Shell remains in associations perceived by many to be blocking climate change action.
Shell has made good progress on living and implementing its values and standards within the company, particularly as regards safety and social performance. We would like to see further progress and examples of implementation of Shell sustainability policies within the company’s joint ventures, investments and contractors.
Conclusion
The ERC applauds the progress made in the 2014 report and encourages Shell to continue to improve its transparency and reporting practices. International reporting best practices are rapidly evolving as a response to different stakeholder needs and demands, providing relevant information through a diverse range of channels. In this context, Shell’s current reporting model might be complemented by additional tools and formats, for example, real time information and cases on the website, which could help Shell reach a wider range of audiences and stakeholders by using different media in a coordinated way.
Further exploration of long-term trends and the details regarding Shell´s contribution to the development of solutions for the energy transition could be more consistently integrated into the company´s strategy disclosure. The ERC expects future reporting initiatives to deal with these issues in an appropriate manner and for future reports to include holistic sustainability targets.
We look forward to the ongoing engagement process with Shell´s Executive Committee in June 2015, expressing again our appreciation of and thanks for the quality of our dialogue.
