Shell’s Empty Transition Promise

The oil and gas major’s Scope 3 commitments are muted but welcome, as expansion plans continue to prevail over sustainability targets.  

When Shell published its first energy transition strategy in 2021, investors and climate-focused NGOs alike were underwhelmed, with some even co-signing an open letter denouncing the plan. 

Much has happened in the three years since then – from Russia’s invasion of Ukraine and the subsequent energy security crisis, to major rollbacks on climate ambition in the oil and gas sector. 

As the clock winds down to 2030, Shell – alongside other companies – has been under increased investor scrutiny regarding its decarbonisation efforts.  

In February, environmental charity ClientEarth filed a case with the UK High Court, arguing that Shell’s continued investment in fossil fuel projects was a breach of directors’ duties to promote the company’s best interests. The case was supported by investors with more than 12 million shares in Shell. In addition, NGO Global Witness filed a case against Shell in the US, alleging that the firm had misled investors by overstating its investments in renewable energy. 

Shell has also faced pressure from Norges Bank Investment Management following a series of destructive oil spills in the Niger Delta region. 

“The reality is that oil and gas companies are going to be around for decades, so it’s important that shareholders who are concerned about climate change continue to push them to progress on emissions reductions,” Maeve O’Connor, Oil, Gas and Mining Analyst at financial think tank Carbon Tracker, tells ESG Investor. “No one is advocating for turning the oil and gas taps off overnight, as this would cause massive global economic upheaval. But, as the International Energy Agency (IEA) has made quite clear, there should be no new oil and gas projects if we are to achieve a 1.5°C or 1.8°C scenario.” 

It was hoped that Shell’s 2024 energy transition strategy, published this month, would demonstrate sufficient climate ambition and move the needle. While investors have welcomed some progress, there are nonetheless areas in which the strategy falls short.  

Shell’s shareholders will be allowed an advisory vote on the strategy at the company’s annual general meeting (AGM) on 21 May.  

Mixed bag

Shell’s updated energy transition strategy confirmed progress on Scope 1 and 2 emission reductions, with the company announcing a 31% decrease as of 2023 compared with 2016 levels – over halfway towards its goal of halving those by 2030.  

In addition, Shell had reduced its net carbon intensity across Scopes 1 to 3 by 6-8% by 2023 compared to 2016 levels, though it is targeting a 9-12% reduction by 2024 and a 9-13% by 2025. 

In its new strategy, the company claims it will invest US$10-US$15 billion between 2023-2025 in low-carbon energy solutions, such as electric vehicle charging, biofuels, renewable power, and carbon capture and storage. Last year, it invested US$5.6 billion in low-carbon solutions – 23% of its total capital spending. 

Most notably, experts who spoke to ESG Investor welcomed Shell’s pledge to reduce customer emissions – also known as Scope 3 – from the use of its oil products by 15-20% by 2030 compared to 2021 levels.  

Shell’s Scope 3 emissions amounted to 517 million tonnes of CO2 equivalent last year, down from 569 million in 2021. 

Despite this progress, Shell has continued to lay much responsibility for Scope 3 emissions at its clients’ door.  

“Reducing the net carbon intensity of the products we sell requires action by both Shell and our customers,” the group said in its 2024 strategy. “While we encourage the uptake of low-carbon products and solutions, we cannot control the final choices customers make. Support from governments and policymakers is essential to create the right conditions for changes in demand.” 

Moreover, the company has chosen to scrap its 2035 target to reduce the net carbon intensity of its products by 45%, due to “uncertainty in the pace of change in the energy transition”. 

Companies’ 30-year decarbonisation targets will inevitably be impacted by the pace of global decarbonisation, acknowledges Matt Crossman, Stewardship Director at UK-based investment manager Rathbones.  

“The systemic nature of risk means investors can’t allow for nobody to take responsibility on Scope 3 emissions,” he says. “While we are aware that they aren’t perfect, [oil and gas] companies should be setting goals for the reduction of those emissions, within appropriate boundaries to be credibly aligned with the Paris Agreement.” 

Echoing these thoughts, Carbon Tracker’s O’Connor expressed disappointment that Shell’s strategy focused on emissions intensity, rather than absolute emissions reduction.  

“Intensity targets can be met simply by changing the energy mix in an oil and gas producer’s portfolio,” she explains. “If they add renewables into the mix, their energy intensity comes down – even if they are still producing the same volume of oil and gas, and therefore the same amount of emissions as before.” 

Shell’s investment in renewables and energy solutions fell to 11% in 2023 (US$2.7 billion), down from 14% in 2022. 

Crumbling bridges 

Shell’s decarbonisation targets remain primarily focused on oil production. As such, the company plans to grow its liquefied natural gas (LNG), which it describes as a “critical fuel” for the energy transition. 

The oil and gas major also claims that global demand for LNG will increase by more than 50% by 2040 as coal-dependent countries progressively switch to gas. 

But the issue, O’Connor explains, is that LNG projects involve long cycles and are highly capital intensive. “If gas demand is to fall – the IEA expects it to peak before 2030 – these projects could be at risk of generating low returns for investors,” she adds.  

Vietnam’s first LNG terminal has been delayed until 2027, while the Philippines has faced contractual issues for gas-fired plants due to costs. Meanwhile, Bangladesh has racked up US$5 billion in outstanding energy payments for imported fuel. 

“Natural gas is the light cigarette of the oil and gas industry,” says climate activist group Follow This Co-founder Mark van Baal. “Gas as a bridge fuel would have been nice to utilise 30 years ago, but there’s no time for it now. Oil and gas companies must decarbonise very fast, and that is not going to be achieved by simply moving from one fossil fuel to another.” 

Earlier this year, 27 institutional investors with €4 trillion (US$4.6 trillion) in AUM and 5% of Shell’s stock co-filed a climate resolution with Follow This at the oil and gas major. They called for the company to align its medium-term Scope 1 to 3 decarbonisation targets with the Paris Agreement and take more ownership of its Scope 3 emissions. 

“Shell’s updated strategy has moved the company even further away from Paris Alignment,” says Van Baal. “The ball is now in the investors’ court. They have the voting power to enact change.” 

One of the co-filers of the Follow This shareholder resolution is UK workplace pension scheme Nest.

We’re naturally concerned by the weakening of Shell’s carbon intensity targets for 2030 and 2035, said Diandra Soobiah, Nest’s Head of Responsible Investment. “We will be speaking with Shell shortly and making our disappointment in these decisions clear.”

Field of laggards  

Putting things into context, Shell’s progress on the energy transition certainly isn’t the worst when compared to its peers. 

“It’s fair to say that the oil and gas industry at large hasn’t been progressing at the kind of speed required to meet climate goals,” says O’Connor. “But it’s not a homogenous industry – there are leaders and laggards.” 

A new Carbon Tracker report assessed 25 oil and gas firms on their degree of alignment with the Paris Agreement based on their investment options, recent project sanctions, production plans, emissions targets, and executive remuneration. Of the included companies, only three were planning for flat fossil fuel production volumes in the near term, and only one – BP – was targeting a decline. 

Although Shell was within the top cohort of assessed firms, it still only scored an ‘E’ grade. “One of the best of a bad bunch, when you consider the fact that none of the assessed companies scored between an ‘A’ to a ‘C’,” O’Connor notes.  

BP was top of the class with a ‘D’ grade. 

“It’s easy to be a leader in a field of laggards,” van Baal agrees. “There isn’t a single oil and gas major that has serious plans to align with Paris; they all want to hold on to fossil fuels as long as possible.” 

Reflecting on these findings, it’s perhaps understandable that some investors have become frustrated by the sector’s lack of progress.  

Last year, the Church of England Pensions Board and Church Commissioners divested from all oil and gas firms that failed to align with climate goals – including Shell. In addition, a collective of UK-based asset owners convened a roundtable to address growing concerns surrounding asset manager voting activities within the oil and gas sector, with bespoke research conducted by Andreas Hoepner, Professor of Operational Risk, Banking and Finance at University College Dublin. 

Oil and gas firms would do well to acknowledge that the energy transition doesn’t just concern climate-focused investors, O’Connor suggested. 

“Climate change-related concerns aside, the energy transition will continue to accelerate – simply because the industry has been disrupted by new technologies that are cheaper, cleaner and secure in the long term,” she says. “It’s a prudent business decision for an oil and gas company to ensure it’s not reliant on the sales of a product for which demand is rapidly eroding.” 

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