The External Review Committee (ERC, or the Committee) is pleased to share in this letter its independent opinion on Shell’s Sustainability Report 2013 (the report). Our engagement started in October 2013, when the ERC met with senior Shell leaders including then-CEO Peter Voser and Board members Chad Holliday and Sir Nigel Sheinwald. In January 2014, the ERC met newly appointed CEO Ben van Beurden and discussed his perceptions of the challenges facing Shell and his beliefs about sustainable development.
The Committee thanks Shell for the way it organises the ERC process. The meetings are well structured and allow for a thorough understanding of the nuances, challenges and opportunities faced by an oil and gas company in the context of sustainable development.
We look forward to the June 2014 in-person meeting with the Shell Executive Committee that will complete the 2013-14 ERC process at which time we will discuss Shell’s sustainability strategy and performance at length.
Overall report quality
The report provides comprehensive coverage of the main issues facing Shell and clear insights into how the company aims to address the main sustainability challenges it faces as it seeks to meet growing energy demand in a responsible way. While this approach has served the company well in the past, societal expectations are moving faster than corporate reporting is evolving. The comments presented in this letter reflect what the ERC believes Shell needs to do more to lead again in the sustainability reporting space.
The Committee has consistently encouraged Shell to explain in a more strategic and forward-looking manner how it addresses sustainable development challenges and dilemmas. This may require directly addressing questions such as: how might Shell’s portfolio evolve given the urgent need to curb greenhouse gas (GHG) emissions? How does Shell aspire to further use its influence and convening power to engage with other stakeholders to identify and accelerate more sustainable solutions? What sustainability performance targets will Shell commit to deliver, and how will the targets and progress against them be communicated to stakeholders?
While the ERC welcomes Shell’s advocacy for meaningful carbon pricing and stronger fiscal incentives for Carbon Capture and Storage (CCS), it also recognises that the company’s participation in trade associations and other organisations that sometimes take less progressive positions, or even ones counter to Shell’s views, may undermine stakeholders’ trust. The ERC thinks Shell’s reporting should explain more clearly how participation in such bodies provides net benefit to society.
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 in previous years, the Committee notes the challenge of developing a sustainability culture and urges ongoing explanation of the ways Shell transfers lessons from the establishment of its strong safety culture. The ERC welcomes the report’s description of the non-technical specialists who work in the project development process to ensure that Shell understands the societal and economic context as well as the governmental, regulatory and environmental aspects of projects and the ways these contribute to above-ground risk. The Committee looks forward to further exploration of the unique capacity of these employees.
The ERC believes that the urgency of climate change and the overall pace of change require reporting that goes beyond the company’s own operations.
The International Energy Agency says the current path of global GHG emissions is likely to result in a temperature increase of 3.6 °C to 5.3 °C. Also, Shell’s New Lens Scenarios are described in the report and depict pathways on which emissions overshoot the point at which temperature rise can be limited to 2 °C.
As Shell operates in a rapidly changing sustainability context, the ERC encourages Shell’s reporting to further explore the potential consequences of this dynamic and evolving environment on its business model. In particular, future reports should better articulate the capacity of Shell’s current investment strategy to deliver value if climate change undermines investor confidence in the future value of fossil fuel assets. In addition, the Committee also believes that the report should outline Shell’s assessment of climate and related stresses on its operations and investment cycle.
In this context, Shell’s portfolio investments in gas, biofuels, energy efficiency and CCS efforts are positive and help prepare for the transition to a more carbon constrained world. At the same time, the predicted path of global GHG emissions begs clearer explanation of how the company will deal with climate change challenges. This might be accomplished by expanding report coverage on Shell’s approach to the way it collaborates with others and outlining the kinds of step change that Shell anticipates will be required in terms of technology, public policy and market responses.
The Report explains how technology is unlocking affordable and abundant natural gas resources worldwide. Shell describes gas as the best way for society to meet energy needs while quickly reducing emissions, especially by using gas to displace coal for power generation.
There is also clear description of Shell’s approach to tight gas and how it applies its operating principles to address the concerns of stakeholders and improve its performance, including of methane emissions. However, the report should provide more information on why it is so important for methane emissions from tight gas production to be fully understood and adequately controlled, which is still a matter of controversy.
Tight oil and gas production also require hydraulic fracturing. While the report mentions possible impacts on emissions and local water resources related to increased hydraulic fracturing and that the baseline assessments are often made publicly available, it is not completely clear on how and when these are shared with stakeholders.
The ERC notes the report’s explanation of how investments in biofuels, coupled with R&D in advanced biofuels, might deliver lower carbon transport solutions. The Committee welcomes the description of Shell’s efforts to improve operating standards in the biofuel industry, especially through the Bonsucro certification process.
The report is transparent in its treatment of Shell’s approach towards gas flaring, outlining the company’s policy against flaring on new projects and progress on reducing flaring. The Report also explains why significant flaring is ongoing in some operations, especially Iraq and Nigeria. The ERC looks forward to more detail on the types of solutions the company is exploring – even when the flaring is not under Shell’s full operational control – to significantly and rapidly decrease flaring in these countries.
Social investment strategy and performance
The ERC acknowledges the effort made in this report to clarify the global and local social performance strategy as previously requested by the ERC and welcomes the introduction of the new social impact measurement framework designed to help Shell measure and evaluate the long-term impact of its community investment activities around the world.
In spite of these developments, the ERC still finds the explanation of Shell’s social performance priorities and social investment strategy unclear in how it is applied in a consistent and equitable manner at a country level. The ERC urges future reporting to explore how Shell’s global social operating policies and principles are applied in different country contexts. The report should clarify how references to international good practice standards, like the UN Guiding Principles on Business and Human Rights, illustrate a coherent and consistent approach to managing risk and performance at the project level.
The report presents community engagement in detail, but it is unclear how Shell ensures that this process works consistently to address stakeholder concerns. The ERC suggests the report articulates Shell’s approach to stakeholder engagement more clearly. Such disclosure would include how information is shared with stakeholders, how stakeholders are identified, and how stakeholder inputs might influence Shell’s decision-making processes both at the local and global levels.
The ERC recognises Shell’s commitment to transparency and reporting best practice. The Committee also calls on Shell to change its future reporting to better serve the company and the stakeholders trying to understand its sustainability challenges and dilemmas by reading this report, which could reposition the company as an innovative leader in this field.
This might be accomplished by clearer articulation of the implications of shifting sustainability context for the evolution of Shell’s business model and strategy. The report would also be improved by a narrative that cascades from an integrated sustainability vision and ambition to specific, measurable, achievable, real and time-bound goals and targets, which in combination would enhance readers’ ability to judge progress.
The ERC looks forward to further engagement with the Executive Committee to continue the dialogue with the same level of openness and transparency.