Royal Dutch Shell AGM, The Hague
There was no escaping the wide and varied interest in the company’s long-term viability in a low-carbon world.
There was only one topic on the agenda at the 2017 Royal Dutch Shell AGM that really mattered. From CEO Ben Van Beurden’s extended introduction to the prolonged debate on a shareholder resolution, there was no escaping the wide and varied interest in the company’s long-term viability in a low-carbon world.
Equally, there was no mistaking the message from Shell: “Trust us – we get it”.
Mr Van Beurden used a significant part of his opening remarks to address the issue of climate change and Shell’s role in the low-carbon energy transition. The level of detail and honesty impressed even the environmental NGOs present. While many would disagree with some of the conclusions, it was hard to fault Shell’s ambition or intent. The board gave answers on issues, such as the threat from electric vehicles, that revealed a depth of understanding not present among some of its peers.
No less clear was the company’s support for the goals of the Paris Agreement. The company stated repeatedly that it backed the accord’s aim to keep the rise in average global temperatures to 2 degrees above pre-industrial levels. However, behind the headlines, the narrative was more nuanced and not altogether convincing.
Rathbone Greenbank’s Matt Crossman read a statement signed by members of the Institutional Investors Group on Climate Change with a total of €3.4 trillion in assets under management. The statement was made in the context of the successful 2015 shareholder resolution and an additional resolution at this year’s AGM which requested that the company set carbon emissions reduction targets in line with the Paris Agreement.
The board’s response to this statement gave rise to very mixed feelings.
The company was asked outright to make a public commitment to time-bound targets on emissions reductions; it politely declined. Shell has consistently stated its reasoning for not having public targets on many occasions. Generally, the company feels that a complex business and a complex issue cannot be reduced to a single number, and that such targets run the risk of incentivising the wrong kinds of behaviours.
Furthermore, even if it were open to setting a public target, it would not countenance being legally forced to do so through a shareholder resolution as this would prove overly restrictive.
The heart of the debate on public targets came down to the wording of this year’s shareholder resolution with much of the board’s opposition centring on the inclusion of Scope 3 emissions – that is, emissions not just from Shell’s own operations but also from the use of its products by its customers.
The company was keen to stress – not unfairly – that the only way it could set and meet science-based targets for Scope 3 emissions would be to stop selling oil and gas-related products. If Shell alone were to do this, then there would be no net benefit as customers would simply shop elsewhere.
Furthermore, the targets could have perverse consequences, actively discouraging investment in projects which might increase Shell’s own emissions but reduce those of society as a whole. An example cited by Shell is its efforts to capture and process gas that would otherwise be flared by other producers in Iraq. Such projects increase Shell’s Scope 1 (direct) and Scope 3 emissions, but cut emissions from gas flaring overall to a much greater degree. The targets, if implemented, would discourage Shell from investing in such projects.
However, many shareholders present felt that the company failed to address the direct emissions part of the resolution. It is fair to say that the Dutch investors speaking in favour of the special resolution were united in their disappointment at the company’s failure to deliver a workable compromise.
The inclusion of Scope 3 emissions is problematic, but this should not allow the company a free pass on the other elements of the resolution. Targets are set which are aspirational in other areas – zero harm to staff for example – so, why not in this vital area? Furthermore, as the company has established climate-related performance goals for its executive remuneration scorecards, many wondered why these could not be translated into public, group-wide targets.
The board was also asked if, in light of its repeated commitment to the Paris Agreement, the company would be working to deliver a new set of scenarios which take into account this new political reality, in line with its precedent of issuing a series of future scenarios through which to explore different version of a low-carbon future. This request was refused by the board.
However, Greenpeace took up this line of questioning and prompted the company to reveal that it is in fact using five climate change scenarios internally: two that look at strong versus weak policy action, two that contrast fast versus slow technological change and a fifth, more ‘normative’ zero carbon scenario. Only the latter has thus far been made public.
The ‘elephant in the room’, however, was the sheer lack of technological progress in developing systems to capture and store carbon. It’s clear that Shell’s existence in a scenario compliant with the Paris Agreement is still hugely dependent on the large-scale rollout of carbon capture and storage (CCS).
Shell’s work on this front is executed under its membership of the Oil and Gas Climate Initiative (OGCI) through which it is investing capital in joint ventures aimed at scaling up the technology.
There is now a pressing need for Shell and its fellow OGCI members to do a much better job of explaining how their limited investment can make a difference at the scale and speed necessary. They also need to make a stronger connection between the need for CCS to scale up and the complementary need for strong carbon pricing.
The final result of the vote on the shareholder resolution showed that the company’s arguments had held sway with only 6% of votes cast in favour. While we fully supported its intention, we also acknowledged that its wording was problematic. We therefore withheld our votes on behalf of Rathbone Greenbank clients. When abstentions were added in, over 10% of shareholders failed to back the company, suggesting some opportunity for further engagement in the coming year.
While no shareholder would want Shell to put itself at a competitive disadvantage, the scale of the issue facing society makes it imperative that oil and gas companies do more to show how they aim to lower emissions associated with the end use of their products.
Resolutions that demand broader emission targets, and increased transparency around them, are only going to attract increasing support in the coming years. Until Shell’s board can provide a response that reassures shareholders, it should be prepared for a bumpy ride.