Shell Takes Major Steps To Tackle Climate Change
By Sofy Robertson
International oil companies are facing a dilemma; how can they continue to deliver value to their shareholders whilst facing up to their impact on the planet? Can they reduce greenhouse gas emissions without sinking their businesses? Royal Dutch Shell has become the first oil major to insist that it could.
On December 3rd, Shell announced that it would set specific targets for reducing carbon emissions every three to five years. Their goal is to shrink their net carbon footprint by half by 2050.
In a ground-breaking initiative, Shell will also ask shareholders to reward executives for managing a transition to cleaner energy, though the details of this are still to be worked out. Remarkably, Shell’s targets will include more than the emissions from its own production of gas and oil. The oil major plans to account for all cars, lorries, planes and factories that will eventually burn their product. Shell will also use sales of its products to estimate their subsequent emissions.
Further proposed changes from the international oil company include reviewing ties with lobbying groups determined to undermine action on climate change. The steps that Shell are preparing to take are unprecedented and speak as a reminder of how far the rest of the industry has to go.
Despite their critics, oil majors remain a staple of investment portfolios. They are responsible for paying considerable, reliable dividends. Incredibly, Shell has not cut its dividend since the second world war. Rather than fleeing from them, the top twenty institutional investors globally account for a rising proportion of their shareholders.
In spite of this, shareholder resolutions on climate change have become an increasingly common feature at annual meetings. In the past four years, the number of votes on such resolutions has more than doubled. Last year, 310 investors concerned about environmental damage and managing a staggering $32trn between them, launched a group to coordinate their efforts called Climate Action 100+. Oil majors now express support for the Paris Climate Agreement and their bosses lead the Oil and Gas Climate Initiative; a voluntary effort to lower emissions from their operations.
Despite this, oil chiefs take very different stands on how their firms should evolve. For example, BP spent nearly $13m this year to defeat a ballot initiative for a carbon tax in Washington State. Shell and other companies have severed their holdings with oil sands, one of the most carbon-intensive sources of oil, whereas ExxonMobil remains a big owner.
Shell’s announcement to set specific targets to reduce emissions comes as quite a shock to the industry, constituting an about-face turn after chief executive, Ben van Beurden, recently dismissed similar plans as “foolhardy” (The Economist). Van Beurden explained that Shell would be vulnerable to law suits if it missed its goals. However, talks with investors led by hedge fund Robeco and the Church of England Pensions Board, sparked a change in direction for the company. They agreed to set short-term goals in the service of a longer-term ambition and the adjustable nature of these targets will lower the company’s legal risk, reveals an energy lawyer. If van Beurden can succeed in protecting both the planet and his company’s dividend, there is little doubt that other major oil firms will follow suit.