Targets used by Shell to manage climate-related risks and opportunities and performance against targets

Shell’s material climate-related risks and opportunities are set out in the “Climate-related risks and opportunities identified by Shell over the short, medium and long term” section. Our response to the energy transition risk focuses on decarbonising our value chain. Our climate targets are focused on reducing our NCI and our absolute emissions.

Setting targets for NCI

There is no established standard for aligning an energy supplier’s decarbonisation targets with the temperature limit goal of the Paris Agreement. In the absence of a broadly accepted standard, we have developed our own approach for demonstrating Paris alignment by setting carbon intensity targets within a pathway derived from the IPCC SR 1.5 scenarios. This pathway is aligned with the more ambitious temperature goal of the Paris Agreement to limit global average temperature rise to 1.5°C above pre-industrial levels by 2100. 

When constructing the pathway, we started by filtering out certain scenarios to ensure that Shell’s targets are aligned with earlier action, and low-overshoot scenarios. Overshoot refers to the extent to which a scenario exceeds an emissions budget and subsequently relies on sinks to compensate for the excess emissions. Next, we calculated the carbon intensity (gCO₂e/MJ of energy) for each of the remaining scenarios by dividing net emissions by total final energy consumption, with electricity represented as a fossil fuel equivalent.

To set a starting point, we then indexed the resulting carbon intensities to a common value of 100 in 2016 to remove the impact of differences between Shell’s historical net carbon intensity and the intensities calculated from the IPCC scenarios. Finally, the pathway was constructed using the range of carbon intensity reductions over time. Outlying values at the top and bottom of the range were removed, which had the effect of narrowing the final pathway.

By using the 1.5°C pathway produced by this approach to set our targets, we aligned them with the necessary reduction in carbon intensity shown in the 1.5°C scenarios. This is illustrated in the table, which shows that our targets are positioned within the range of the 1.5°C pathway. The upper and lower limits represent the upper and lower boundaries of the 1.5°C pathway derived using the approach described above.

Until 2035, our calculation of the total net emissions of each scenario includes only the expected mitigation actions by Shell such as carbon capture and storage and offsetting using natural sinks, including any use of offsets included in the carbon-neutral energy products we offer our customers. After that date, we included mitigation actions taken separately by our customers. This is because we expect that customers will need to take action to mitigate their emissions from the use of our products if society is to achieve the goals of the Paris Agreement.

To account for reductions in emissions across full energy value chains it is necessary to build new protocols to include mitigation actions by both energy suppliers and users. Energy suppliers report the Scope 3 emissions from the use of their products, which are equivalent to the Scope 1 emissions reported by the users of those products. However, when users of energy products mitigate their Scope 1 emissions by the use of carbon capture and storage or offsets there is no protocol for reflecting a corresponding reduction in the Scope 3 emissions reported by the energy supplier. We will continue to engage stakeholders on these carbon protocols and will seek to align with new frameworks as they evolve.

Shell has set a target to reduce the net carbon intensity of the energy products it sells by 20% by 2030. We believe this target is aligned with a 1.5°C pathway derived from the IPCC SR 1.5 scenarios. We also believe that the pace of change will vary around the world by region and by sector, taking into consideration the time needed for energy users to invest in large-scale equipment and the energy infrastructure changes needed for Shell to deliver more low- and zero-carbon energy.

The chart below shows our progress since 2016 in reducing our Scope 1 and 2 emissions and gives an indication of how we expect to achieve our target in 2030. The actions we will take to achieve our target will depend on the evolution of our asset portfolio and the continued development of technologies which reduce carbon emissions. Following divestment activity in 2022, we expect that on a net portfolio basis, new investments across our portfolio will increase our Scope 1 and 2 emissions between 2023 and 2030 and that they will exceed reductions associated with planned divestments and natural decline. Our investments in producing low-carbon energy such as biofuels will increase our Scope 1 and 2 emissions, while reducing the net carbon intensity of the products we sell. Subsequent reductions in our emissions are reflected in the mechanisms outlined below and reflect an expected path to meeting our target in 2030. 

The biggest driver for reducing our NCI is increasing the sales of and demand for low-carbon energy. The chart below illustrates how changes in the volume of products and services we sell could result in NCI reductions to 2030. The change in our sales of these products and services will also reflect the development and adoption of new technologies and infrastructure, and the adoption of public policies designed to encourage the energy transition.

Linking Shell’s emissions targets to remuneration policies

We have established remuneration policies which are designed to support us in achieving our net-zero emissions targets:

• Our Performance Share Plan (PSP) and Long-term Incentive Plan (LTIP) are linked to net carbon intensity targets; and
• Our PSP, LTIP and annual bonus scorecard are linked to performance indicators that guide an assessment of our success in delivering our energy transition strategy.

See also “Directors’ Remuneration Report”.

The LTIP and PSP are designed to ensure that remuneration is clearly aligned with Shell’s operating plan and longer-term strategic ambitions. The same measures apply to Executive Directors and Senior Management and to a significantly broader employee base.

The LTIP (measured over a three-year performance period) is used to make long-term share incentive awards to Executive Directors, Executive Committee members and Senior Executives. 

PSPs are long-term incentives, also measured over a 3 year performance period, designed to retain key employees and ensure they have a greater investment in Shell’s future. 

Energy transition performance condition and the vesting of the 2020 LTIP and PSP awards

The following performance outcomes for the energy transition performance condition were considered in the assessment of the 2020 LTIP and PSP vest, covering the performance cycle 2020-2022:

In addition to the above, a number of broader indicators of Shell's progress in the energy transition were considered. Overall, it was determined that the energy transition measure (accounting for 10% of the LTIP award and 5% of the PSP award) should vest at 180%.

See also “Annual Report on Remuneration”.

Energy transition performance condition in the 2022 LTIP and PSP awards

For LTIP and PSP awards granted in 2022, the energy transition performance condition had a weighting of 10% for the PSP and 20% for the LTIP. The energy transition performance condition for these awards includes a mix of leading and lagging indicators on the following strategic measures:

• Build a valuable power business: our ambition is to expand our power business through selective investments in generation and by reselling power generated by others;
• Grow new lower-carbon energy product offerings: continue to invest in low- and zero-carbon products, such as renewable electricity, hydrogen, biofuels and chemicals;
• Develop emission sinks: invest in carbon capture and storage opportunities, to reduce emissions where there are no currently scalable low-carbon alternatives, and in the development of high-quality nature-based projects, to compensate for emissions; and
• Reduce the NCI of the energy products sold by Shell.

The vesting outcome of the LTIP awards is at the discretion of the REMCO, and will be guided by performance indicators set at the outset of the scheme alongside a more holistic assessment of progress.

Proposed energy transition performance condition for 2023 LTIP awards

For 2023 LTIP awards, assessment of performance against energy transition measures will be based on NCI reduction, plus supporting strategic themes including: 

• Reducing Scope 1 and 2 emissions; 
• Building a renewable power business;
• Growing new lower-carbon energy offerings; and
• Developing emission sinks and offsets.

The REMCO assesses progress against the NCI target and Shell’s longer-term goals for each strategic theme when making the vesting decision for each reward cycle.

See “Annual Report on Remuneration”- for more information on the proposed performance framework.

Energy transition targets in the annual bonus scorecard

Delivering on our net-zero emissions target is a part of the annual scorecard, which helps determine annual performance bonus outcomes for senior management and almost all of Shell’s employees.

The energy transition progress measures in our annual scorecard have, until 2022, focused on managing and reducing our operational emissions. However, succeeding in the energy transition requires us to change what we sell. In 2022, we widened the scope of the energy transition progress measures in the annual bonus scorecard:

• Selling lower carbon products – we help customers to reduce their emissions by supplying low-carbon products. We measure our success by the earnings share of our Marketing activities from low-carbon energy products as well as non-energy products and convenience retail.
• Reducing operational emissions – our target is to achieve a 50% reduction by 2030; and this measure is based on reducing our Scope 1 and 2 operational emissions. 
• Partnering to decarbonise – we seek to collaborate with our customers to help them reduce their emissions. In 2022, we measured success in this area in terms of our progress in rolling out our electric vehicle charging network.

In 2022, the score for operational emission reductions was above the top end of the range. It reflects the cumulative effects of actions taken across the portfolio, including GHG abatement projects, permanent shutdowns and conversions of some facilities such as the shutdown of some units at the Shell Energy and Chemicals Park Singapore, flaring reduction and energy efficiency projects (see “Scope 1, Scope 2 and Scope 3 GHG emissions and related risks”). The above reductions do not include CO₂ reduced by CCS projects.

We have set annual targets measuring our roll-out of electric vehicle charge points, in line with Shell’s target of having more than 500,000 by 2025. We outperformed the 2022 target, with a significant increase in the second half of the year.

The full year score for providing lower-carbon products was on target. We will continue to deliver decarbonisation solutions sector by sector enabled by innovation and collaboration.

See also “Annual Report on Remuneration”.

Metrics and targets in respect of climate-related environmental risks

We have set targets to reduce our consumption of fresh water in water-stressed areas by 15% by 2025, compared with 2018 levels. We also monitor the level of waste disposed of from our operations, and the amount of plastic waste generated.

See “Respecting Nature” and “How we create value” for more information.

Basis of preparation – net carbon intensity

Shell’s NCI provides an annual measure of the life-cycle emissions intensity of the portfolio of energy products sold. The intended use of the NCI metric is to track progress in reducing the overall carbon intensity of the energy products sold by Shell. The NCI is calculated on a life-cycle basis and as such includes GHG emissions – on an equity basis – from several sources, including:

• direct GHG emissions from Shell operations;
• indirect GHG emissions from generation of energy consumed by Shell; and
• indirect GHG emissions from the use of the products we sell.

Emissions from other parts of the product life cycle are also included, such as those from the extraction, transport and processing of crude oil, gas or other feedstocks and the distribution of products to our customers. Also included are emissions from parts of this life cycle not owned by Shell, such as the extraction of oil and gas processed by Shell but not produced by Shell; or from the production of oil products and electricity marketed by Shell that have not been processed or generated at a Shell facility.

We also take into account emissions mitigated through various measures, such as by creating carbon sinks by working with nature – including through protecting forests and wetlands – and by using CCS technology.

Refer to scope of NCI for details of the supply chains and steps in the product life cycles that are included in the Net Carbon Footprint methodology.

The following GHG emissions are not included in the NCI:

• emissions from production, processing, use and end-of-life treatment of non-energy products, such as chemicals and lubricants;
• emissions from third-party processing of sold intermediate products, such as the manufacture of plastics from feedstocks sold by Shell;
• emissions associated with the construction and decommissioning of production and manufacturing facilities;
• emissions associated with the production of fuels purchased to generate energy on site at a Shell facility;
• other indirect emissions from waste generated in operations, business travel, employee commuting, transmission and distribution losses associated with imported electricity, franchises and investments; and
• emissions from capital goods, defined by the GHG Protocol as including fixed assets or property, plant and equipment (PP&E), and other goods and services not related to purchased energy feedstocks sourced from third parties or energy products manufactured by third parties and sold by Shell.

The NCI calculation uses Shell’s energy product sales volume data, as disclosed in the Annual Report and Sustainability Report. This excludes certain sales volumes such as:

• certain contracts held for trading purposes reported net rather than gross. Business-specific methodologies to net volumes have been applied in oil products and pipeline gas and power. Paper trades that do not result in physical product delivery are excluded; and
• retail sales volumes from markets where Shell operates under trademark licensing agreements.

Important notes on the NCF methodology

1. The NCF is not a mathematical derivation of total emissions divided by total energy, nor is it an inventory of absolute emissions.
2. It is a weighted average of the life-cycle CO₂ intensities of different energy products, normalising them to the same point relative to their final end-use. The use of a consistent functional unit, grams of carbon dioxide equivalent per megajoule (gCO₂e/MJ), allows like-for-like comparisons and the aggregation of individual life-cycle intensities for a range of energy products including renewables.

For further information see our detailed NCF methodology documentation (shell.com/ghg).

Basis of preparation – absolute 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 under Shell’s operational control.
• Scope 2: indirect GHG emissions from generation of purchased energy consumed by Shell assets under operational control.
• Scope 3: other indirect GHG emissions, including emissions associated with the use of energy products sold by Shell.

GHG emissions comprise carbon dioxide (CO₂), methane (CH₄), nitrous oxide, hydrofluorocarbons, perfluorocarbons, sulphur hexafluoride and nitrogen trifluoride, with carbon dioxide and methane being the most significant contributors. Our GHG inventory was prepared in line with the requirements outlined in the ISO 14064-1:2018 Specification with Guidance at the Organisational Level for Quantification and Reporting of Greenhouse Gas Emissions and Removals and the GHG Protocol’s Corporate Accounting and Reporting Standard.

In line with external standards, Shell aggregates its GHG emissions into tonnes of CO₂ equivalent by applying global warming potential (GWP) factors to each greenhouse gas. These factors are taken from the IPCC Fourth Assessment Report (AR4) over a 100-year time horizon, in line with the UK Government GHG Conversion Factors for Company Reporting.

GHG emissions are aggregated using a bottom-up approach: emission source -> asset -> operating unit -> business -> Group. GHG emissions in this Report include emissions from Upstream, Integrated Gas, Renewables and Energy Solutions, Downstream (Chemicals and Products and Marketing), and Projects & Technology, plus Shell’s functions. All operated assets are included in the GHG inventory in the reporting period.

Basis of preparation – Scope 1 emissions

Sources included in Scope 1 emissions comprised:

• combustion of carbon-containing fuels in stationary equipment (e.g. boilers, gas turbines) for energy generation;
• combustion of carbon-containing fuels in mobile equipment (e.g. trucks, vessels, mobile rigs);
• flares;
• venting and emissions from industrial processes (e.g. hydrogen plants, catalytic cracking units); and
• fugitive emissions, including piping and equipment leaks and non-routine events.

Our Scope 1 emissions follow the GHG protocol guidance. As a result, the following are not included in our reported Scope 1 emissions:

• CO₂ emissions from biogenic sources (for example, biofuels, biomass). Instead, they were captured separately. Methane and nitrous oxide emissions from biogenic sources were included in our Scope 1 emissions.
• Captured CO₂ that was subsequently sold or otherwise transferred to third parties.
• CO₂ captured and sequestered using CCS technologies. However, the emissions from operating CCS were included in our Scope 1 and 2 emissions.
• Carbon credits.

All significant sources were included in the Scope 1 inventory.

Basis of preparation – Scope 2 emissions

Sources included in Scope 2 emissions comprised indirect emissions from purchased and consumed electricity, steam and heat. We did not identify any assets with imported cooling or compressed air used for energy purposes.

Scope 2 emissions were calculated using the market- and location-based methods separately as defined by the GHG Protocol Scope 2 Guidance.

All significant sources were included in our Scope 2 inventory.

Basis of preparation – Scope 3 emissions

This Report provides Scope 3 emissions included in our NCI. They were consolidated using the equity boundary approach. Under this approach, we reported the Shell share of emissions from energy products sold by Shell to end-users, including those sourced from third parties. Scope 3 categories included in the total number in this Report include the following:

Scope 3, Category 1: purchased goods and services

This category includes well-to-tank emissions from purchased third-party unfinished and finished energy products excluding electricity (which was reported separately under Category 3: Fuel and energy-related activities (not included in Scope 1 or Scope 2)).

Emissions in this category were estimated using well-to-tank emission factors for crude oil, natural gas, refined oil products (such as gasoline, and diesel), LNG and biofuels. Because the emission factors include transport, we did not estimate emissions from transport of purchased third-party products separately.

Emissions from purchased non-energy products were not included in this Report.

Scope 3, Category 3: fuel and energy-related activities (not included in Scope 1 and 2)

This category includes well-to-wire emissions from purchased third-party electricity sold by Shell, calculated using the market-based method. Emissions were not adjusted for any potential double-counting of sold natural gas that may have been used for generating this electricity.

This category does not include:

• indirect emissions from generation of imported energy (steam, heat or electricity consumed by our assets). These emissions were reported separately as Scope 2 emissions; and
• well-to-tank emissions from purchased electricity, steam and heat consumed by our assets (i.e. Scope 3 emissions from extraction, refining and transport of primary fuels before their use in the generation of electricity or steam).

Scope 3, Category 9: downstream transport and distribution

This category includes estimated emissions from transport and distribution of energy products produced or refined by Shell. It does not include the emissions associated with transporting third-party products, which are included in Scope 3, Category 1. In order to avoid double counting the emissions from transport, Scope 1 and 2 emissions from transport included in our equity emissions were subtracted from the total in this category.

Scope 3, Category 11: use of sold products

This category includes estimated emissions from the use of sold energy products, such as LNG, GTL, pipeline gas, refined oil products and biofuels. The emissions consist of two sub-categories: products manufactured and sold by Shell, and third-party products sold by Shell.

This category does not include non-energy products that may have been combusted during use (for example, lubricants).

Biogenic CO₂ emissions from combustion of sold biofuels

Biogenic CO₂ emissions from combustion of sold biofuels were estimated and reported separately outside of scopes. Methane and nitrous oxide have been included in Scope 3, Category 11 in line with the ISO 14064-1:2018 and GHG Protocol requirements.

We did not estimate biogenic CO₂ emissions in other Scope 3 categories. It is assumed that the presence of biogenic emissions in other categories is negligible at present.

Other Scope 3 categories

As noted above, this Report only covers Scope 3 GHG emissions included in the boundary of our NCI metric.

Other Scope 3 GHG emissions can be found on our website: www.shell.com/ghg.