Overall it is equally if not more crucial

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Last updated: December 21, 2019

Overall review of theCDP report, the annual report and the sustainability report shows that Shellhas made progress year over year in limiting GHG emissions and tyingsustainability to company performance through ensuring accountability, KPItracking and modifying the scorecard structure. However, this must be built onand expanded to incorporate Scope 3 emissions, develop quantifiable low carbonstrategy and link capital allocation to a long-term portfolio vision that’sheavy in renewables instead of gas.Shell has significantinvestment in Deepwater projects and has taken multiple steps to reduce operatingcosts enabling the projects to be viable in a low oil price environment.

Whilethis is laudable, it could expose the company to safety and environmental risksif cost cutting measures resulted in lower safety and operating standards.Also, Deepwater projects are capital intensive, limiting the company’s abilityto swiftly respond to shift in energy demand and policy changes to curb GHGemissions.Another area ofconcern is that Shell doesn’t have a significant capital allocated for NewEnergies.

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Even though the annual report talks about transition to low carbonassets, less than 5% of Capital is allocated to development of the green energyassets. It would be beneficial if the company shared the likely portfolio itwill be operating with in the next 10-20 years given the capital allocation. Whileit is informative to share the impacts of current assets, it is equally if notmore crucial to understand how future investments will shape the company. Speciallyto comprehend whether renewables and cleaner energies will make a major shareof the portfolio.

As part of the annualreport, Shell must also highlight the impact of carbon pricing on the demand ofits products and how it aligns with its current portfolio of assets. In thelast few months, Shell has divested its Heavy Oil assets as part of post BGacquisition divestments, which should reduce the company’s footprint. However,it would be helpful if the annual report had a detailed analysis on theresilience of Shell portfolio of assets such that the goals of the ParisAgreement are met.

There must also be evidence of capital allocation thatsupports the transition to cleaner energy and allows for measurement against quantifiablemilestones. These milestones could be captured in KPIs that impact performancescorecard, tying the monetary incentives to a plan that meets the goals ofParis Agreement.When providingabsolute targets, Shell only lists Scope 1 emissions whereas Galp Energia anticipateschanges in both Scope 1 and Scope 2 emissions based on undertaken initiatives. Toconsider total lifecycle emissions Scope 1, Scope 2 and Scope 3 emissionsshould be considered as part of the low-carbon transition strategy. Based on thereports published thus far, Shell has not set out a holistic strategy thataddresses the total lifecycle emissions.Shell recognizes thatgiven its scale and nature of business, it is a significant GHG emitter; however,the company has placed several initiatives in place to reduce the impact and measurethe performance. While the company integrates sustainability into its strategyand has put in place committees, initiatives, targets and incentives to achievethe goals and fulfil commitment, there are no plans to get to a zero emissionsstage. There is also a considerable uncertainty associated with measuring Scope2 emissions, which could be off by as much as 20%.

In comparison, Galp Energia,a leader in CDP reporting, estimated the level of uncertainty between 2% to 5%for Scope 1 and Scope 2 emissions.Shell engages inactivities that could either directly or indirectly influence public policy onclimate change by direct engagement with policy makers and trade associations. Inaddition, Shell funds research organizations. Shell prefers emissions tradingschemes (ETS) including cap and trade. However, where not feasible or accepted,Shell supports carbon pricing instruments.Shell uses aninternal price of carbon to make investment decisions. Since 2008, all projectshave been screened assuming a $40 per tonne of price on carbon emissions.

Thisallows the company to either eliminate projects that have a higher footprint orto alter the project design to reduce environmental footprint. While $40/tonneis a base case assumption, Shell runs price sensitivities and scenarios toconsider the impact of higher GHG prices, especially for projects in countries thatare more likely to impose a stringent carbon tax.Shell recognizes theimportance of sustainability and incorporates it in its business strategy,which is focused on financial returns, operational excellence and sustainabledevelopment. Commitment to sustainability is reflected not only in the businessstrategy but also in the rewards and incentives offered. Shell SustainabilityReport 2016 states that sustainable development continued to account for 20% ofthe company scorecard, which helps determine the annual bonus levels for allemployees, including members of the Shell Executive Committee.

Sustainabledevelopment focuses on Safety (10%) and Environment (10%). Safety encompassesboth people and process safety whereas Environment focuses on GHG management(refining, chemicals and flaring). Previously, environment scorecard focused onfresh water use, spills and energy intensity. However, based on feedback fromthe Corporate and Social Responsibility Committee, it was revised to focus onGHG management.

Royal Dutch Shell is anEnergy company that is taking significant measures to provide energy in a responsiblemanner that respects people, their safety and the environment. Shell CEO (ChiefExecutive Officer) and the Executive committee are accountable for the climatechange actions.  EVP (Executive VicePresident) S&E (Safety and Environment) is responsible for climate actionsand is nominated as the risk owner. There is a separate committee called GroupCO2 that evaluates climate change related groups, helps develop GHGemissions management strategies, and oversees the implementation programme. Thegroup is lead by VP CO2, who reports to the EVP S&E.

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