We are at the start of a crucial transition decade during which companies and governments will make decisions that will determine if they, but also if society, will achieve the goals of the Paris Agreement over the next three decades. This is a multi-decadal transition that will be complex and potentially highly disruptive.
Before we look at the specific case of Shell, we need to first recognise the context within which we are operating. There are three points to make here.
First, it is clear governments need to go faster. Increased commitments outlined by leaders at the Biden Summit last week are welcome but indicative of the gap that still remains in public policy if we are to limit warming to 1.5 degrees Celsius.
Second, the oil and gas sector remains critical to the global economy today, and even under the most ambitious future climate scenarios, will continue to remain critical although its production is expected to decline significantly in coming years.
Third, the vast majority of oil and gas is produced by national and private oil and gas companies. We need, of course, to see progress in publicly listed companies but we also need to progress across the sector as a whole, both on the supply side (i.e. what the companies do) and, equally critically, on the demand side (i.e. what customers do and the choices they make).
Shell’s transition from an oil and gas producer to a diversified energy company, a multidecadal transition is now underway
In that context, when we look at the oil and gas sector and at individual companies within the sector, it is important to consider different things. Companies need to show us what they can do. We need to understand the art of the possible (in terms of actions, in terms of timeframes), as much as the desired endpoint. We need companies to take action, to explore the opportunities, to learn from that experience and to share the lessons of that experience with us. We need companies to bring their industry peers with them. And we need companies to show us the role that can and should be played by others.
As investors concerned about climate change and committed to real and meaningful action, we face complex dilemmas. We want to engage with and push individual companies to reduce their greenhouse gas emissions in line with the goals of achieving net zero by 2050. We know that we need to recognise progress even if companies have a long way to go. We recognise that this is a sector where not all companies are responding to climate change.
We take our responsibilities extremely seriously, and have therefore committed to engaging with companies in the sector, to encourage them and their peers to take action. This engagement has led to real change. We are seeing oil and gas companies make net zero commitments and start to explain how these are to be delivered. We have seen companies review their trade associations’ lobbying and start to withdraw from those whose lobbying is clearly inconsistent with the goals of a net-zero economy. Of course, more is needed but the evidence is clear: shareholder engagement is capable of delivering real, substantial change in corporate practice and performance.
I would go further and say it has been the single most effective investor strategy with the oil and gas sector.
So turning from the sector to the company, how will we respond to Shell’s recently published energy transition strategy, a strategy that has emerged from extensive investor engagement through CA100+?
I will start by clarifying that this most certainly is not a once-only vote on Shell’s energy transition strategy. It is the first of three transition strategies that will be put to shareholders for an advisory vote during this transition decade. Investors will also have an annual advisory vote to express whether sufficient progress has been made in delivering the strategy. As a fund we are absolutely clear that this in no way undermines or replaces the responsibility company directors have and we will continue to hold them accountable for the transition of Shell.
Furthermore, the company’s target is clear: To achieve net-zero absolute emissions reduction by 2050. The target has been expressed in both absolute and intensity and covers all scope 1, 2 and 3 emissions. Whilst there are legitimate questions about the path to achieving it the goal is clear and unambiguous, and Shell is accountable for delivering that target.
Should we trust Shell on this? Shell has certainly led the industry to this point. It was the first oil and gas company to break the consensus within the sector to acknowledge its responsibility to address scope 3 emissions, which account for the vast majority of the “life-cycle” emissions from the burning of the products they sell and society uses. It was the first oil and gas company to set targets to reduce those emissions and the first to include performance indicators for achieving those targets in their executive remuneration.
It was the first in its industry to respond to investor concerns that corporate climate lobbying through industry associations impedes ambitious policy implementation and they have put various associations on notice. It is now the first oil and gas company to give its shareholders an advisory vote on its energy transition strategy.
In sum, Shell’s transition from an oil and gas producer to a diversified energy company, a multidecadal transition is now underway. This is not the end of investor engagement. In line with the Climate Action 100+ benchmark, Shell will need to ensure that absolute emission equivalent targets sit alongside short- and medium-term intensity targets, and will need to provide further evidence of alignment of capital expenditure.
Aspects of the strategy are dependent on significant scaling of technology such as CCUS (carbon capture, utilisation and storage), hydrogen and credible provision of biodiversity off-sets. These dependencies and uncertainties are all areas for further engagement and will require Shell to provide evidence it is delivering on its strategy.
Different paths are emerging for how a publicly-owned oil and gas company can transition to net zero. Some companies will diversify into renewables, some will evolve into energy providers and some will simply run down their assets and pay back to shareholders. We are working with the Institutional Investors Group on Climate Change and the other climate investor networks to define an oil and gas net-zero standard that can further support this transition and outline with clarity the measures needed to do this credibly.
As investors, we are unquestionably entering a more complex phase in corporate engagement. Given Shell’s progress as a result of engagement and its leadership’s commitment to continue to meaningfully engage on the remaining areas of the Climate Action 100+ benchmark, the Church of England Pensions Board is likely to vote in support of Shell’s energy transition strategy. The Church of England Pensions Board believes Shell is starting to transition to net zero and the pace of change will continue in response to engagement with its shareholders.
Our continued support will be contingent on evidenced progress and recognising that, along with other shareholders, we have an ongoing opportunity to hold Directors to account on the delivery of the strategy, to vote on progress on an annual basis, and to vote on future plans.
Adam Matthews is the Chief Responsible Investment Officer of the Church of England Pensions Board and Co-Lead for CA100+ Engagement with Royal Dutch Shell