ERC opinion

As in past years, the ERC benefited from structured engagement with Shell’s senior leadership and from participation in the report topic selection process. In our opinion, the report appropriately covers the main issues relevant to Shell and its stakeholders with the exception of one emerging issue which we note below.

The ERC commends Shell for updating the report format this year by embracing a web-first, interactive design approach for the narrative as well as for the presentation of performance data.

Shared value and social performance

The ERC has long advocated for Shell to improve its reporting on social performance. We see improvements in the 2016 report, such as increased disclosure on indigenous people and resettlement. Social performance reporting could be further strengthened by discussing the challenge of applying social performance standards uniformly worldwide.

We welcome the addition of shared value as one of company’s four strategic ambitions. However, the report provides little information on how Shell plans to create and deliver shared value. Given it is one of Shell’s four strategic ambitions, a clear and consistent definition and a framework for measuring progress on shared value needs articulating. For stakeholders to understand shared value and see its impact, future reporting needs to describe how it is embedded throughout Shell’s business and overall sustainable development agenda.

Energy transition and climate change

The 2016 report describes more clearly the company’s intended contribution to the transition to a low-carbon future. However, the ERC finds the report ambiguous on the necessary pace of change, plus how Shell discusses the evolution of its business sometimes seems at odds with the report’s own commentary on the urgency implied by the science of climate change as well as trends in many other sectors. There is a lack of discussion about how exploration and production will change over time or how in these two areas Shell will prioritise investments and activities. The report would also benefit from more detail on the key nations where Shell is partnering with governments to plan and execute pathways through the energy transition.

The report describes the activities planned under the New Energies portfolio but is silent on how Shell plans to win investor support for progressively increasing and accelerating investment in low-carbon alternatives, which today often offer different or lower returns than traditional oil and gas investments.

We are encouraged to see that the Quest carbon capture and storage (CCS) project exceeded its annual target to safely capture and store 1 million tonnes of CO₂ in its first full year. Looking forward, we recommend more disclosure on how Shell will develop more CCS projects, especially as part of gas and downstream operations, as well as more detail on how Shell will share Quest-related learning. More importantly, future reporting should discuss the implications for Shell’s strategy if broad deployment of CCS on the scale envisioned in Shell’s scenarios were significantly delayed.

As in previous years, the report does not share with readers any targets to indicate the intended pace of Shell’s transition to a lower carbon portfolio. The ERC recommends the report include such goals in future.

Natural gas and methane

The ERC is encouraged by the steps Shell is taking to eliminate venting and flaring of natural gas, especially now gas plays an even bigger part in Shell’s portfolio following the BG acquisition. The report makes clear Shell’s commitment to natural gas, and how Shell sees it as an important fuel in the journey towards an energy transition. However, natural gas cannot play a constructive role in a low-carbon transition without minimisation of methane emissions.

The ERC is pleased that Shell has now joined the Climate and Clean Air Coalition’s “Oil and Gas Methane” partnership, but suggests further action and disclosure are needed. Given Shell’s advocacy and emphasis on natural gas, it is important for Shell to articulate a comprehensive plan for methane reduction. This should address the operating practices and regulatory requirements that are needed for the oil and gas industry to deal effectively with the problem of methane leakage from the production, transportation and use of natural gas.

Product stewardship and circular economy

The report lacks comprehensive information on Shell’s approach to product stewardship, particularly end of life responsibility and circular economy initiatives. The ERC recommends that the company share more in the report about the policies and plans that will guide development of Shell thinking on product stewardship including end of life as well as the ways that the circular economy may affect Shell’s businesses.

Advocacy, partnerships and collaborations

The report describes various partnerships and collaborations through which Shell advocates its position on sustainability issues, including on climate change. There is growing global concern that oil and gas companies have advocated against stronger climate regulations though their trade associations and in private discussions with governments. The ERC suggests that future reports clarify when and how Shell’s public positions on material issues differ from those of its trade associations.

Divestments

In 2016, Shell announced a $30 billion divestment programme, which will raise capital and has the potential to shift the carbon intensity of the company’s portfolio. The ERC believes the report should explain to stakeholders how Shell addresses the environmental and social liabilities associated with divested assets.

Nigeria

The ERC recognises the security challenges and complexity of operating in Nigeria and notes Shell’s safety record there improved in 2016. The ERC suggests future reporting should explain in more detail the steps Shell is taking to minimise harm to communities from spills and the timeline for major remediation commitments.

Conclusion

The Committee recognises Shell’s commitment to transparency and reporting best practice and to stakeholder engagement, including with the ERC. There is progress in the 2016 report, particularly the prominent disclosure of changes to the sustainability elements of the executive scorecard and compensation, as well as the inclusion of more strategic topics. In the 2017 report, the ERC hopes to see clearer description of quantifiable and time-bound sustainability goals and ambitions, which will enhance the reader’s ability to judge progress.