Paris Climate Agreement tabled at the agenda of next SHELL AGM : our voting recommendation

SHELL Shareholders are asked to approve a shareholder proposal submitted by Follow This  requesting that the Company set and publish targets that are aligned with the goal of the Paris Climate Agreement to limit global warming to below 2 degrees.

Follow This is a Dutch group representing shareholders that collectively hold 645,314 shares in Shell. The group is sponsored by several organisations, including the sustainable infrastructure consultants APPM Management Consultants. We supported a similar resolution by Follow This at the 2017 AGM. The resolution received the approval of 6.34% of shareholders (total FOR votes and abstentions reached 11.35%).

The shareholders request that the Board set and publish Company targets that are aligned with the goal of the Paris Climate Agreement to limit global warming to well below 2°C.  These targets should:

—  cover the greenhouse gas (GHG) emissions of the Company’s operations and the use of its energy products – Scope 1, Scope 2, and category 11 of Scope 3 (emissions from use of Shell’s refinery fuel and natural gas products, and sold CO2 transfers), excluding emissions from use and disposal of non-fuel products;

—  consider the longterm (2050) and intermediate objectives;

—  be quantitative and reviewed regularly; and

—  be based upon tangible metrics such as GHG intensity metrics (GHG emissions per unit of energy produced) or other metrics that the Company finds suitable to align its targets with a well-below-2°C pathway.

 

The shareholders are concerned with the Company’s role and responsibilities as market-leader and the image that their practices are setting publicly.

The Board does not support the proposal, declaring that it is not in the best interests of the Company and its shareholders. It is the Board’s opinion that the Company is already making adequate efforts to achieve the same goal as is set-out in this proposal, declaring their commitment to the Paris Agreement. The notice of general meeting, and response to this proposal, outlines the existing Company targets to reduce carbon emissions: to cut the net carbon footprint of the Company’s energy products – expressed in grams of CO2 per megajoule consumed – ‘by around 20%’ by 2035, and ‘by around half’ by 2050. The Board also references the Company’s intentions to expand the New Energies business, and the continuing connection of emissions efficiency with employee and Director remuneration.

 

  • Analysis

The Company’s direct GHG emissions (Scope 1) increased from 70mt to 73mt CO2-equivalents during the year. Shell’s flaring activities increases slightly from 7.6mt CO2-equivalents in 2016 to 8.2mt CO2-equivalents, but remains below 11.8mt CO2-equivalents recorded in 2015. Indirect GHG emissions (Scope 2; due to purchases in electricity, heat, and steam) increased from 11mt to 12mt CO2-equivalents (after reporting a decline to 9mt of CO2-equivalents last year). Unlike last year, Shell did not disclose its Scope 3 emissions for 2017. In 2016, Shell estimated that CO2 emissions from the use of its refinery and natural products by others (Scope 3) totaled 600mt, representing less than 2% of world emissions.

Shell noted that it intends to invest $1-$2 billion per year on average on New Energies (supporting its energy transition) through to 2020. This pales in comparison to its total non-GAAP capital budget of $22.2 billion and total capital employed of almost $283 billion at the end of the year. Notably, executives have yet to be rewarded for progress in investment in New Energies since the Company felt that it is “too early to start including long-term energy transition metrics in remuneration in a meaningful way, not least because the New Energies business is not yet at scale”.

 

  • ECGS Voting Recommendation

Despite our misgivings regarding the lack of detail in the resolution, we do believe that oil majors such as Shell should play a fundamental role in promoting a low-carbon future and this starts by honoring the commitments under the Paris Agreement. Although the Company has made progress in reducing its GHG emissions in recent years, the lack of long-term targets critically undermines this process and fails to appropriately incentivize executives. Case in point is in 2017 where both Scope 1 and Scope 2 emissions increased.

We additionally find it unacceptable that Shell did not make an attempt to link investments in New Energies to executive compensation. Moreover, a target annual budget of $1-$2 billion for said investments is abysmally low considering a capital budget that can easily exceed $20 billion in a given year. Shareholders should also note that, like most of its oil major peers, Shell is not a signatory to the Science-Based Targets Initiative.

As we concluded last year, the unwillingness to set tangible reduction targets for GHG emissions makes it difficult to truly measure Shell’s progress towards transitioning to cleaner energy and alludes to the fact that its strategy to reduce its carbon footprint rests heavily on the transition towards natural gas, especially after the BG acquisition.

Accordingly, we recommend shareholders approve this external resolution.

Expert Corporate Governance Service (ECGS) is a proxy firm advising investors about their exercise of voting rights at shareholders general meeting. ECGS relies on the expertise of independent local experts to analyse shareholders general meetings under common methodologies. ECGS partners do not provide any consultancy service to the corporates .

Proxinvest is the French partner and the managing partner of ECGS.

 


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