Governance of climate-related risks and opportunities
Board oversight of climate-related risks and opportunities
In 2021, Shell reshaped and restructured our organisation to place our energy transition strategy at the heart of everything we do. Our governance is designed to effectively manage our transition to a net-zero emissions energy business by 2050, in step with society’s progress towards achieving the goals of the Paris Agreement.
Our governance begins with the Board’s approval of our energy transition strategy and oversight of its implementation and delivery. In 2021, the Board considered climate-related matters throughout the year when reviewing and guiding our energy transition strategy, assessing the risk management policies in place, and challenging and endorsing the business plans and budgets, including overseeing major capital expenditures, acquisitions and divestments. In 2021, the Board convened 12 times and continued to regularly oversee the Powering Progress Strategy and net-zero initiatives, including at the Board Strategy Day in June 2021.
Three Board committees provide primary oversight of the delivery of our energy transition strategy: the Safety, Environmental and Sustainability Committee (SESCo), the Audit Committee and the Remuneration Committee. See “Climate change governance organogram” below.
SESCo provides oversight of our technical delivery in driving reduction of our carbon emissions, and the potential impacts and adaptation measures related to the physical risks of climate change. This includes reviewing our Carbon Management Framework and monitoring progress in reducing emissions to meet targets. SESCo met 13 times in 2021 and discussed climate-related matters at nine meetings. After each meeting the SESCo Chair provided updates to the Board directly. For more information on SESCo’s activities in 2021, see Safety, Environmental and Sustainability Committee.
Our Audit Committee provides oversight of the effectiveness of our internal controls and risk management framework to ensure that our financial statements reflect the risks and opportunities associated with our energy transition strategy and climate change. During 2021, the Audit Committee convened 11 times in total and discussed climate-related matters on at least six occasions.
More information on our Audit Committee’s activities in 2021 can be found in the Audit Committee Report.
The Remuneration Committee sets our remuneration policy and targets designed to challenge and support management to reduce our carbon emissions while maintaining shareholder value. The Remuneration Committee met five times during 2021, with climate-related matters discussed at each meeting.
Climate performance and remuneration
Climate-related key performance indicators were considered as part of the 2021 annual bonus scorecard (15% weighting) for almost all of Shell’s employees, as well as the 2021 Performance Share Plan (PSP) awards (10% weighting) and the 2021 Long-term Incentive Plan (20% weighting, vesting in 2023) for senior executives.
See “Directors’ Remuneration Report” for further information.
The importance of our energy transition strategy means that all of these committees are informed about climate-related matters on a frequent basis throughout the year.
Find additional information on the Board’s oversight in “Governance framework”.
Management’s role in assessing and managing climate-related risks and opportunities
The Chief Executive Officer (CEO) has the delegated authority from the Board to manage Shell’s actions in relation to the Company’s strategy, which includes climate change. The CEO is assisted by a number of senior management positions on climate-related matters to implement Shell’s energy transition strategy and ensure that such matters are appropriately monitored:
- The Director of Strategy, Sustainability and Corporate Relations supports the CEO in developing Shell’s energy transition strategy, including climate scenarios development, and augmenting the Company’s Carbon Management Framework. This framework includes the setting of carbon budgets for our businesses, and the implementation of carbon-related activities.
- The Downstream Director identifies climate-related opportunities while managing and mitigating the climate risks of our existing Downstream businesses. The Sectors and Decarbonisation organisation supports the Downstream Director in implementing the sectoral decarbonisation approach.
- The Integrated Gas, Renewables and Energy Solutions Director is responsible for finding and developing low-carbon solutions and opportunities, including those across our solar, hydrogen and wind businesses, as well as managing and mitigating carbon emissions from our business.
- The Upstream Director is responsible for identifying low-carbon and emission reduction opportunities in our Upstream oil and gas business through managing and mitigating our carbon emissions, for example, by eliminating routine flaring and in some cases by using renewable energy to power our oil and gas extraction activities.
- The Projects & Technology (P&T) Director is responsible for setting emissions, climate, and reporting standards that are applicable to all our businesses. The P&T Director is also responsible for developing new technologies that will help our businesses to deliver net-zero emissions targets through both energy efficiency measures and research and development activities geared towards decarbonisation.
- The Chief Financial Officer (CFO) is responsible for monitoring the effective application of the Shell Control Framework, which provides the basis for managing our material risks including climate-related risks and opportunities, and the assurance over our financial information, carbon emissions and climate-related disclosures.
Delivering through three strategic pillars
There are two key supporting management committees, with representatives from across the organisation:
- The Capital Investment Committee (CIC) facilitates the portfolio management discussions to ensure that the climate risks and opportunities are embedded in investment decision-making. This committee is made up of senior executives, including the CEO, CFO, and individual business directors.
- The Carbon Reporting Committee (CRC), which was formed in 2021, is sponsored by the CFO, and includes senior management representatives from business units, Projects & Technology climate-related disciplines and various functions such as Strategy, Finance and Legal. This committee is tasked with ensuring that greenhouse gas (GHG) emissions measures, both absolute emissions and carbon intensity, and associated metrics, comply with all regulatory and legal requirements. The CRC is responsible at Group level for effectively embedding Group-wide training plans, measurement and reporting of GHG emissions metrics, and review and approval of external disclosures.
Our network of country chairs supports the overall governance and development of climate-related opportunities. They set each country’s energy transition strategy within our Powering Progress strategy.
Processes by which management is informed about climate-related issues
Several processes are employed across the organisation to ensure that management teams can effectively monitor and manage climate-related matters. The management teams are helped by a combination of carbon-management-related standards and frameworks, forums at various levels of the organisation, and capability development programmes. These include our Carbon Management Framework, carbon pricing, and the Greenhouse Gas (GHG) and Energy Management Manual.
Carbon Management Framework
In 2021, we worked on augmenting our comprehensive Carbon Management Framework (CMF). The CMF seeks to implement an approach to managing and reducing our emissions that is similar to how we use our financial framework.
This helps to ensure that management considers carbon emissions when making decisions.
The CMF helps set carbon budgets in our operating plan. For the 2021 operating plan cycle, our net carbon intensity (NCI) targets were translated into Scope 1, 2 and 3 (see definition below) carbon budgets for each business. These were used as boundaries for optimising each business’ operating plan. As a result, the CMF makes it easier to assess the trade-offs between emitting carbon and generating value. This helps to inform portfolio decisions.
Some examples of how our decarbonisation targets are taken into account in fundamental decisions across the organisation are as follows:
- Our businesses further embedded carbon emissions objectives in their individual business units’ Capital, Portfolio and Carbon forums. The forums consist of the most senior business management representatives who are responsible for active portfolio management through evaluation, and delivery of growth and divestment decisions.
- Certain assets are required to identify GHG abatement opportunities and reflect them in their annual business plans.
Definition – Scope 1, 2 and 3 emissions
We follow the GHG Protocol’s Corporate Accounting and Reporting Standard, which defines three scopes of GHG emissions:
- Scope 1: direct GHG emissions from sources that are owned or controlled by Shell.
- Scope 2: indirect GHG emissions from generation of purchased energy consumed by Shell.
- Scope 3: other indirect GHG emissions, including emissions associated with the use of energy products sold by Shell.
To assess the resilience of new projects we consider the potential costs associated with operational GHG emissions. We have developed country-specific short-medium and long-term estimates of future costs of carbon which are reviewed and updated annually. In 2021, we increased the expected cost of carbon, so by 2050, in real terms our cost of carbon estimates for all countries increased to between $125 and $200 per tonne of GHG emissions. The process for developing our cost of carbon estimates uses short-term policy outlooks and long-term scenario forecasts. We believe our estimates appropriately reflect society’s current implementation of the Paris Agreement. Unfortunately, however, society is not yet on track to meet the goals of the Paris Agreement. Shell will continue to update the cost of carbon estimates to take account of changes in the economic environment and pace of energy transition.
Greenhouse gas and energy management
Each Shell entity and Shell-operated venture is responsible for the development of their GHG and energy management plans.
In 2021, we updated our Greenhouse Gas and Energy Management standard. It is part of both our health, safety, security, environment, and social performance (HSSE & SP) Control Framework, and Asset Management System. This update streamlines accountabilities for GHG and energy management within businesses, assets and projects, tightening the process for analysing our emissions, benchmarking performance, identifying improvement opportunities, and forecasting future performance.
Shell’s GHG and energy management process is integrated into our annual business planning cycles to provide leadership with the robust information required to make decisions on GHG reduction opportunities and portfolio choices required to achieve our decarbonisation targets.
We also created the position of a Global Process Owner for GHG and energy management within our Safety, Environment and Carbon, and Asset Management (SEAM) organisation. The Global Process Owner is responsible for working across Shell businesses to ensure the GHG and energy management requirements are adopted and embedded in business operations, planning, and performance management processes. The Global Process Owner also facilitates the ongoing improvement of processes, tools, communications, and capabilities needed within the businesses to achieve our decarbonisation aspirations.