Climate risk management

Shell's processes for identifying and assessing climate-related risks

Identifying climate-related risks

Shell considers climate change and the energy transition a material risk factor. We monitor the risks related to these across four components:

• commercial risks;
• regulatory risks;
• societal risks (including litigation risk); and
• physical risks.

These components are monitored and assessed on an integrated basis, necessitated by the interdependence of the risks and the related actions. The different components pose different kinds of exposures spanning different time horizons. Similarly, the responses to the components of the risk are also planned by taking a holistic view. Our integrated approach to risk management and the resulting changes in our strategy ensure we manage our aggregate climate change risk within our overall risk appetite over different time horizons.

For example, the increasing cost of complying with emission limits in some regions is a regulatory risk that may require operational responses in the near term. The reduction in demand for legacy hydrocarbons is a commercial risk that may have a medium- to long-term impact, demanding changes to our strategic portfolio and business models. The risk of physical impacts of climate change may occur in the short, medium and long term and may require actions to mitigate adverse impacts on our assets and supply chain. As an example, the transformation of our refineries into energy and chemicals parks reduces the level of our operational emissions and medium- to long-term commercial risks, allowing us to plan for future adaptation measures.

Shell's processes for identifying and assessing risks are part of the Shell Performance Framework.

Our risk management procedures that help us identify climate-related risks and opportunities include:

• monitoring external developments, including policy changes and new regulations;
• evaluating the status of risk indicators, which illustrate how well we are managing each component of the risk related to climate change and the energy transition; and
• learning from incidents and assurance findings.

We use these procedures to identify risks and determine their significance, both individually and relative to other risks.

Assessing climate-related risks

For each identified risk, we evaluate its impact, likelihood and the level of risk we are willing to accept.

When assessing the likelihood of a risk occurring, we consider factors such as our ability to prevent the risk happening and whether the risk has materialised in the past.

We consider the financial consequences and how it might affect our reputation, our ability to comply with regulations, and possible damage to health, safety, our assets and the environment. The impact, and hence materiality, of a risk is based on how critical it could be to our business model. For example, as we operate in multiple countries, societal risks are material to our licence to operate.

The impact and likelihood assessment helps us to prioritise risks and determine their relative materiality, based on a comprehensive picture of significant risks to any relevant business objectives.

To support our risk assessments, we seek to establish the level of risk that we are willing to accept in pursuit of Shell's strategy and objectives. We consider the amount of resources – such as financial resources, people, processes, systems and controls – that we are willing and able to allocate to manage each risk in pursuit of our objectives and the impact for Shell's overall risk profile.

The impact and likelihood assessment, combined with risk appetite, determines the type of risk responses, such as controls and assurance activities, that may be required to manage each risk.

Possible responses include:

• accepting the risk without any further action;
• mitigating or reducing the risk with appropriate controls, supported by assurance activities;
• transferring the risk, for example to insurance providers where appropriate; and
• altogether stopping or forgoing the activity that gives rise to the risk.

In determining our risk responses, we always seek to comply with our Code of Conduct and other boundaries, such as our financial framework, which set the aggregate level of risk appetite that could be sustained. The Financial Framework considers boundaries such as our net debt levels and our credit rating.

Shell's processes for managing climate-related risks

On an ongoing basis, our assets leverage broad risk and threat management processes to identify and respond to emerging challenges to their ongoing safe, compliant and efficient operation, including climate-related risk, as required by our HSSE & SP Control Framework. Our risk management processes are carried out at the Group, business, function and asset level, which includes projects.

We apply the Shell Performance Framework to ensure that we effectively manage our climate-related risks at all these levels. The Framework includes:

• mandatory standards and manuals;
• project-level risk management processes;
• management and Board reviews;
• internal audits; and
• annual assurance letter process.

Mandatory standards and manuals

Our climate change risk management approach is supported by standards and manuals as part of our HSSE & SP Control Framework. They provide guidance on how to monitor, communicate and report changes in the risk environment. These documents aim to:

• ensure consistent management and assessment of climate risk across Shell;
• clarify expectations for risk management and reporting, including roles and responsibilities of the risk owners;
• clarify types of assurance activities that may be applicable;
• strengthen decision-making by ensuring that businesses have better awareness and understanding of climate risks (including their likelihood and potential impact) and mitigation plans; and
• enable integration of Shell's reporting.

We periodically review and, if necessary, update our standards and manuals in light of developments in risks, including those associated with climate change. We are in the process of transitioning to new Safety, Environment & Asset Management Standards as part of the Shell Performance Framework. Our approach continues to evolve as we increase our understanding of changing policies and the differing pace of energy transition in different regions.

Project-level risk management processes

At a project level, assessing climate-related risks is an important part of making initial investment decisions. Projects of a certain size or which carry unusual risks are required to follow Shell's Opportunity Realisation Standard, which sets out the rules for managing and delivering opportunities in the organisation. Each project is assisted by experts from our global subject matter groups during its development, implementation and operation.

Projects under development that are expected to have a material GHG impact must meet our internal carbon performance standards or industry benchmarks. An exception process is in place to manage specific incidental cases. Performance standards are under development for power and hydrogen projects. Our performance standards are used for measuring a project's average lifetime GHG intensity or energy efficiency per asset type. Projects with a material GHG footprint that meet the performance standards or industry benchmarks will often set more ambitious emissions targets for themselves. GHG abatement plans help determine the nature of these targets, and we assess the effects of a project's emissions alongside economic and technical design factors. Applying these criteria ensures that our projects can compete and prosper in the energy transition.

The performance standards are approved by the Executive Vice President accountable for implementation in the relevant businesses, and by the Executive Vice President Safety, Environment and Asset Management.

We assess the future GHG emissions of projects against performance standards and by considering the GHG emissions from the use of the products that are to be manufactured. These assessments can lead to projects being stopped or designs being changed.

We expect the performance standards to evolve as our portfolio changes in the energy transition.

Management and Board reviews

Climate change matters and risks resulting from GHG emissions are reviewed and managed in line with other significant risks through the Board and EC. Management, the Board and Board committees review the risk of climate change and the energy transition to understand and assess emerging issues that may impact our strategy or our responses to this risk at an operational level. For example, as part of the annual planning cycle, the EC and the Board assess how climate change and GHG emissions may affect the pace of the energy transition, business emission reduction plans and the implications for Shell's current portfolio.

We have established several dedicated internal forums related to climate change and the energy transition. These are at different levels of the organisation and seek to address, monitor and review climate change issues.

In addition, each business and function regularly reviews its risk profile, risk responses and assurance activities throughout the year to ensure climate-related risks are managed effectively. These insights are used to provide management with updates on the operational management of climate change and the energy transition risks. During these updates, business and functions management review whether our risk responses are effective in addressing the four sub-components of the climate change and energy transition risk. These reviews help us to update Shell's plans and guide our day-to-day operational decisions such as maintenance schedules and our risk response plans.

Internal audit process

Shell's Internal Audit and Investigations (SIAI) team provides independent and objective assurance and advises management and the Board on the adequacy and effectiveness of our risk management and internal controls.

For example, SIAI conducted five audits during 2023 that included the testing of controls related to GHG emissions measurement, reporting, forecasting and abatement projects.

Annual assurance letter process

Each member of the EC must submit an annual assurance letter to the CEO that their business's or function's activities have been conducted in accordance with the requirements set out in the HSSE & SP Control Framework. This assurance includes the assessment of the effectiveness of the internal controls in managing climate- and energy-transition-related risks.

Integration of the climate-related risk management process into Shell's overall risk management

Our climate-related risk management process follows the approach set out by the Shell Performance Framework, ensuring that it is integrated into the overall risk management processes of the Group.

Climate-related risks are considered from a strategic and operational perspective to ensure we maintain a comprehensive view of the different types of climate risks we face and the different time horizons in which they may affect us. The monitoring and review of risks is a key risk management process in Shell.

The EC, the Board and Board committees review climate-related risks and their impact on the Group. This allows management to take a holistic view and optimise risk mitigation responses, to ensure that climate-related risk responses are properly integrated into the relevant activities.

Project-level risk management in action: Energy and Chemicals Park Rheinland

We are continuing to transform our refining business as part of our drive to create more value with less emissions. Shell announced plans in January 2024 to convert the hydrocracker at its Energy and Chemicals Park Rheinland in Germany into a unit that will produce premium base oils, used to make high-quality lubricants, such as engine and transmission oils.

The Wesseling site near Cologne will stop processing crude oil into petrol, diesel and jet fuel by 2025, and the plant will have a high degree of electrification. These changes are expected to reduce Shell's Scope 1 and 2 carbon emissions by around 620,000 tonnes a year.

The new base oil plant is expected to start operations in the second half of this decade. It will have a production capacity of around 300,000 tonnes a year, equivalent to about 9% of current EU demand and 40% of Germany's demand for base oils.

This investment, financed by Shell's Chemicals and Products business, meets the minimum acceptable internal rate of return set out at our Capital Markets Day in 2023. It is the latest key development in the transformation of the Energy and Chemicals Park Rheinland. We are already investing in a 10-megawatt electrolyser to produce renewable hydrogen and a biomethane liquefaction plant.