Impact of climate-related risks and opportunities on Shell’s businesses, strategy and financial planning
The transformation of the energy system to net-zero emissions will require simultaneous action in three areas – an unprecedented improvement in the efficiency with which energy is used, a sharp reduction in the carbon intensity of the energy mix, and the mitigation of residual emissions using technology and natural sinks. While it is difficult to predict the exact combination of actions that will deliver the net-zero goal, scenarios help us to consider the variables and the potential direction and pace of the transition needed.
We have been developing scenarios within Shell for almost 50 years, helping Shell leaders to explore ways forward and make better decisions. Shell scenarios are designed to stretch management’s thinking when it comes to considering events that may be remotely possible. Scenarios help management make choices in times of uncertainty and transition as we grapple with tough energy and environmental issues. They are aligned to different energy transition pathways and help in decision-making by guiding the identification of risks and opportunities.
Different socio-economic and technological parameters are used to construct these scenarios, such as:
- sectoral and regional energy demand;
- future trajectory of oil consumption and demand for natural gas;
- renewable electricity demand and the pace of the electrification of the global energy system;
- supply of solar and wind energy;
- pace of uptake of electric vehicles;
- demand for biofuels;
- growth of the hydrogen economy;
- level of carbon capture and storage (CCS);
- deployment of lower-carbon energy technologies; and
- global trade of oil and gas.
Management consideration of different climate change outcomes informs a range of areas including, but not limited to, the setting of the long-term strategy, business planning, and investment and divestment decisions. The outcomes considered by management vary in relation to the extent and pace of the energy transition.
Impact on strategic planning
The application of scenario analysis informs our assessment of the impact of a wide range of risks and opportunities, including climate-change related issues, on our strategy and business planning, both at the Group and business unit levels. At the Group level, the potential impacts of the energy transition on our business model are discussed and assessed at the Board and the Executive Committee level as part of the annual strategic and business planning cycle. This assessment allows us to challenge accepted ways of thinking, identify material risks and opportunities, and identify key tensions and trade-offs.
Key financial and non-financial components of business planning
The Board approves our annual business plan. The plan contains operational and financial metrics, and its objective is to drive the delivery of our Powering Progress strategy.
Decarbonisation targets are key to our business planning process. Each business owner offers viable Scope 1, 2 and 3 reduction opportunities as part of this process, in line with the CMF (see “Governance of climate-related risks and opportunities”).
The business plan is underpinned by assumptions about internal and external parameters and includes:
- commodity prices;
- refining margins;
- production levels and product demand;
- exchange rates;
- future carbon costs;
- the schedules of capital investment programmes; and
- risks and opportunities that may have material impacts on free cash flow.
These assumptions are developed with input from our scenarios and internal estimates and outlooks. The level of uncertainty around these assumptions increases over longer time horizons.
Impact on business and financial planning
There is no single scenario that underpins Shell’s business and financial planning. Scenarios are not intended to be predictions of likely future events or outcomes and, therefore, are not the basis for Shell’s operating plans and financial statements. Our scenarios help in developing our future oil and gas pricing outlooks. The oil and gas pricing outlooks takes account of factors relating to the energy transition, such as potential changes in supply and demand (see details of scenario parameters above). The low-, medium- and high-pricing outlooks are prepared by a team of experts, reviewed by the Shell Executive Committee, and approved by the CEO and CFO. The medium pricing outlook represents management’s reasonable best estimate and is the basis for Shell’s financial statements, operating plans and impairment testing.
Shell’s targets to reduce absolute Scope 1 and 2 emissions by 50% by 2030, compared with 2016 levels on a net basis (i.e. including carbon credits), and 20% reduction in net carbon intensity by 2030 have been included in Shell's operating plan. We will continue to update our business plan, price outlooks and assumptions as we move towards net-zero emissions by 2050.
As described in “Climate-related risks and opportunities identified by Shell over the short, medium and long term”, the low-pricing outlooks could result in increased commercial, regulatory and societal risks, as well as transition opportunities. How these risks are prioritised is described in “Shell’s processes for identifying and assessing climate-related risks”. Given our target to become a net-zero emissions energy business by 2050, the use of low-pricing outlooks is a part of our resilience testing and resulting actions.
Our strategy and national net-zero commitments
In line with LR 9.8.6FG, we have considered the extent to which country-level net zero commitments have been considered in developing our transition plan.
Our Powering Progress strategy aims to deliver a net-zero emissions energy business by 2050. The pace of the energy transition will be heavily influenced by government policy, creating a strong country and regional dimension in seeking to deliver the aims of the Paris Agreement. Our commitment is a global one and, as such, we look to deliver our strategy through a global lens.
We seek to translate our energy transition strategy into specific targets and plans at a business segment level, ensuring we take capital deployment and portfolio decisions in the context of the globally integrated nature of our operations. However, we continue to recognise the importance of engagement and collaboration in delivering the fundamental changes to the energy system that are required. This includes supporting and advocating for policies that aim to reduce carbon emissions and working with governments and other stakeholders in the development of policy that supports the transition to a lower-carbon energy system. As national transition plans develop, consideration will be given to the impact on our operations and the associated implications for our energy transition strategy.