On December 3, 2018, Royal Dutch Shell PLC (Shell) issued a joint statement with institutional investors in which it committed to certain steps to further the goals of the Paris Agreement on climate change, including linking executive compensation to short-term carbon footprint targets.
Background
The joint statement was developed between Shell and a group of institutional investors, led by Robeco and the Church of England Pensions Board, on behalf of the Climate Action 100+ initiative. According to the Joint Statement:
- Climate Action 100+ is a five-year initiative led by investors to engage systemically important greenhouse gas emitters and other companies across the global economy that have significant opportunities to drive the clean energy transition and help achieve the goals of the Paris Agreement. To date, 310 investors with more than USD $32 trillion in assets under management have signed on to the initiative.
Shell’s Joint Statement With Investors
According to a December 3, 2018 press release, Shell:
- . . .plans to set short-term targets as part of a long-term ambition to reduce the Net Carbon Footprint of its energy products. The company plans to link these targets to executive remuneration, subject to shareholder approval.
Joint Statement Summary
Shell has committed to take certain actions “in order to demonstrate further industry leadership and alignment with the goals of the Paris Agreement on climate change,” including the following, as quoted directly from the Joint Statement:
- Public short-term Net Carbon Footprint targets
1) Shell has stated a long-term ambition to reduce its Net Carbon Footprint associated with the energy products it sells in step with society’s drive to meet the goals of the Paris Agreement. Shell aims to reduce its Net Carbon Footprint by around half by 2050 and by around 20% by 2035 as an interim step.
2) To operationalise this long-term ambition, Shell will start setting specific Net Carbon Footprint targets for shorter-term periods (three or five years). The target will be set each year for the next three- or five-year period. The target setting process will start from 2020 and will run to 2050.
- Targets linked to remuneration
1) Taking into account the perspectives gained through its engagements with shareholders and other relevant stakeholders, Shell will incorporate a link between energy transition and long-term remuneration as part of its revised Remuneration Policy, which will be subject to a shareholder vote at the 2020 Annual General Meeting (AGM).
2) If approved at the AGM, the policy will include a Net Carbon Footprint-related measure, as well as other measures, to have a balance of leading and lagging performance metrics over a three-or five-year performance period. The measures for each performance period will be set on an annual rolling basis at the time of the award and will be subject to the annual remuneration target-setting process as well as to the final plan design. The measures and targets will evolve as time progresses over the years to 2050.
3) The final plan design is being discussed with shareholders, including details relating to the appropriate remuneration structure and appropriate measures and metrics.
- Review of progress
1) On an annual basis, Shell will publish an update on its progress towards lowering its Net Carbon Footprint. In the initial years, this disclosure will be made in the Sustainability Report, but with a commitment, in line with TCFD best practice, to integrate this into the Annual Report and Form 20-F as appropriate.
2) Shell will seek third-party assurance of its reported Net Carbon Footprint and assurance statements will be published on the Shell website. Shell will also continue to work closely with reputable institutions, such as the Transition Pathway Initiative (TPI), to help in their assessment of Shell’s progress.
3) Every five years, Shell will review the updated Nationally Determined Contributions (NDCs) in line with the Paris Agreement mechanism, the updated scenarios on decarbonisation trajectories and any other developments to assess societal progress in the energy transition. The outcome of this review will be used to calibrate Shell’s ambition and pace of change in line with that of society. The first such review is currently anticipated to take place after 2022.
- Alignment with the TCFD recommendations
1) Shell has been an early supporter of the TCFD and will continue to support and promote the implementation of respective recommendations.
2) Shell will continue to disclose at relevant intervals in line with the TCFD recommendations. This includes the disclosure of its metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.
3) During Management Day 2017, Shell disclosed potential ranges of developments in parts of its existing portfolio to achieve the NCF ambition. Shell will provide transparent and relevant updates through future Shell Energy Transition reports (or any related disclosure) as Shell’s strategy evolves.
- Corporate climate lobbying
1) Shell acknowledges the “IIGCC Investor Expectations on Corporate Climate Lobbying” and recognises the importance of ensuring that its membership in relevant trade associations does not undermine its support for the objectives of the Paris Agreement on climate change.
2) Shell is undertaking a review of these memberships to assess alignment with the company’s stated positions. The result of this review will be made public in Q1 2019.
3) Shell will continue to track and provide information about its trade association activities on climate change-related topics, areas of misalignment and the actions taken in that regard.
Investors Played a Key Role
According to the Joint Statement, institutional investors played a key role in this effort:
As institutional investors and in the context of the Climate Action 100+ initiative, we have engaged with Shell to further build on its ground-breaking Net Carbon Footprint ambition by setting short-term Net Carbon Footprint targets consistent with this ambition and integrating these targets into executive remuneration.
As long-term investors, we share the desire of the Board and management of the company to seek a positive future for the company, which is aligned to the goals of the Paris Agreement on climate change. This has been our motivation for this engagement.
Conclusion and Implications
The Joint Statement, including Shell’s commitments described therein, may serve as a model for investor-led changes to corporate policies relating to climate change. The Joint Statement is available at the following location: https://www.shell.com/media/news-and-media-releases/2018/joint-statement-between-institutional-investors-on-behalf-of-climate-action-and-shell.html. The December 3, 2018 press release is available at the following location: https://www.shell.com/media/news-and-media-releases/2018/leading-investors-back-shells-climate-targets.html.
(Nicole Martin)
