ERC opinion
The External Review Committee (ERC or the Committee) is pleased to share its independent opinion on Shell’s 2015 Sustainability Report (the report).
The ERC recognises that the report has improved considerably compared with previous years in both tone and content, with significant improvements in its structure, flow, design and readability. The ERC believes the report covers the issues most relevant to Shell and its stakeholders. It is helpful that the 2015 report includes a section summarising action taken on some of the issues identified in the 2014 ERC letter.
The ERC’s engagement with Shell’s senior leadership during the 2015 report cycle was well structured; this has enabled the ERC to better understand Shell’s current thinking on its business strategy and sustainability. The report more clearly reflects the social and environmental challenges and opportunities facing the energy industry than in previous years, although the ERC feels there is further room for improvement.
Energy transition and climate change
The report outlines Shell’s approach to the energy transition and how it is preparing for the transition to a lower-carbon world. In our view, the report does not adequately convey the urgency of this transition in light of the 2015 Paris Agreement to keep the global temperature rise well below 2°C above preindustrial levels and to pursue efforts to limit it to 1.5°C. The ERC encourages Shell to disclose more precisely how its strategy aligns with this global ambition and to provide more disclosure on Shell’s thinking on the role of natural gas (and other fossil fuels) beyond 2050.
In terms of technological choices, for example, the report outlines Shell investments in carbon capture and storage (CCS), transportation alternatives based on hydrogen and biofuels, and even renewables. Yet it is not clear whether these efforts are being pursued with the urgency and scale required to meaningfully shift Shell’s operations in the timeframe implied by the Paris Agreement.
The ERC encourages Shell to more clearly articulate short- and medium-term (up to five years) and longer-term (five to 20 years) goals detailing a robust and comprehensive low-carbon transition strategy.
Natural gas and methane
The ERC welcomes the inclusion of a separate section on methane and the description of Shell’s actions to control these emissions. As cited in the report, the IPCC estimates that methane makes up about 20% of man-made greenhouse gas emissions on a CO2-equivalent basis. The ERC also notes that the oil and gas supply chain from production, transmission and distribution is the largest industrial source of these emissions. In light of Shell’s declared strategy to increase its focus on natural gas, the ERC believes that the report understates the magnitude of the climate problem posed by methane and the risk this represents to Shell. The report would benefit from greater clarity on how managing methane emissions and the related risks within its operations are reflected in Shell’s business strategy.
In future reports, the ERC encourages Shell to include more detail on improvements undertaken in measuring and assessing emissions; the steps required to reduce these emissions including specific targets, and the role Shell is playing in advancing legal and regulatory policies that support methane reductions.
Alaska
In recent years, the ERC has raised various questions about Shell’s exploration work in Alaska, for example, urging Shell to communicate how different risk factors are considered in a balanced manner. The 2015 report explains that the ultimate decision to cease Alaska exploration was based on the failure to find hydrocarbons. The report also acknowledges the many challenges Shell experienced in respect of Alaska operations over the last few years, including the high operating costs, increased opposition from environmental groups and others, as well as the unpredictable regulatory environment. The ERC thinks it would help stakeholders to hear more about how the different financial and non-financial risk factors were considered over time and how the company will apply learning from Alaska to ongoing investments in the Arctic and other sensitive regions.
Oil sands
The ERC believes halting construction of the Carmon Creek oil sands project warranted additional explanation. Future reports might include further discussions on the evaluation and balance of technical and non-technical risks for controversial activities such as oil sands development. This could also include discussions on how Alberta’s new oil sands emissions limits – which Shell publicly supported – may impact Shell’s future operations.
Nigeria
In 2015, Shell recorded seven fatalities in four separate incidents in their Nigeria operations. Once investigations are completed, the ERC urges Shell to disclose the measures undertaken to reduce the risk of future events.
The ERC appreciates the complexity of oil leak clean-ups in Nigeria, but encourages Shell to be more transparent in the timing of the remediation programme committed to by the Shell Petroleum Development Company of Nigeria joint venture to implement the United Nations Environment Programme report recommendations.
Targets and goals
For several years, the ERC has encouraged Shell to include sustainability targets and goals in its reporting to demonstrate its long-term ambition and corresponding management focus. The ERC welcomes the inclusion of the new section on reporting against aspirations in the 2015 report which lists goals, performance and plans for 2016 and beyond. The ERC suggests that the report also provides information on the process and the criteria for selecting the reported aspirations, including their standing in Shell’s materiality assessment. The ERC suggests that future Shell reporting includes a more comprehensive list of targets and goals, analysis of performance trends and action taken where performance is below target.
Social performance
The ERC acknowledges strong improvement in the clarity of reporting on Shell’s social performance in the 2015 report. For example, the report makes a much clearer distinction between a rights-based approach to risk management and providing opportunities to local communities and other groups than in the past. Also, the detail provided on Shell community social investment efforts combines well with descriptions of the work of the Shell Foundation, providing a broader understanding of impact. The ERC hopes to see continuing emphasis in the report on this area, which can be strengthened further with more robust indicators and data related to social performance.
Conclusion
The Committee recognises the progress in the 2015 report, particularly the response to the ERC’s recommendations from previous years. In future reports, the ERC would like to see a more strategic conversation on the role of fossil fuels as the world pursues efforts to limit global warming to 1.5°C, and the challenges posed by volatility in the market price of oil. In the 2016 Sustainability Report, we anticipate commentary on the acquisition of BG Group and how this will impact Shell’s sustainability strategy.
