Net-zero emissions pledges must be supported by credible plan of action, experts say.
Oil and gas majors have a lot to do if they want to achieve net-zero greenhouse gas (GHG) emissions by 2050.
With environmental law organisation ClientEarth warning that we have less than 10 years to prevent “catastrophic climate change”, at a glance, Shell’s recently published Energy Transition Strategy seems like a step in the right direction.
The strategy will be updated every three years and, for the first time, an oil and gas firm will put the plan to its shareholders for an advisory (not binding) vote on May 18 2021. “Shell’s Board and Executive Committee remain responsible and accountable for setting and approving Shell’s Energy Transition Strategy,” Shell said.
Reactions to the strategy have been polarising, proving a lack of consensus on the best approach towards decarbonisation.
Adam Matthews, Co-Chair of the Transition Pathway Initiative and Director of Ethics and Engagement for the Church of England Pensions Board, said that the company’s targets are “clear” and would “evolve rapidly as Shell tests and develops approaches with customers”.
The process of energy transition needs to financially benefit oil and gas shareholders, according to Guy Turner, Founder and CEO of Trove Research. “Companies should transition away from producing and selling oil and gas because they think it’s in shareholders’ long-term interest to do so, not because they should be saving the planet,” he says.
After all, there’s always a less environmentally-conscious corporate that will happily buy up any oil and gas a more responsible corporate stops using, so long as there is consumer demand, Turner adds.
Charlie Kronick, Senior Climate Advisor at Greenpeace, argues that “big energy companies are still massively hedging their bets”, making loose commitments to net-zero with no detailed route for getting there.
“Shell is a good example of what happens when a corporate doesn’t fully commit to the transition,” he says.
Greenpeace, alongside ShareAction, Follow This, Reclaim Finance, Oil Change International and the Australasian Centre for Corporate Responsibility (ACCR), published an open letter denouncing the strategy, saying that it doesn’t do enough to satisfactorily address climate change.
The letter was sent to investors managing US$54 trillion AUM, including the CoE Pensions Board and Dutch asset manager Robeco, which both engage with Shell on behalf of the Climate Action 100+ initiative.
Transition at a glance
Shell’s Energy Transition Strategy outlines a number of positive ambitions.
The corporate acknowledged that its total absolute emissions peaked as recently as 2018, at 1.7 gigatonnes. Its overall strategy aims to gradually reduce emissions and inject cash into environmentally-beneficial projects, such as reforestation. Shell aims to reforest at least 220,000 square kilometres in the EU. These efforts would cancel out the remaining 300 million tonnes of CO2 Shell emitted in 2018 by 2050.
Shell has further committed to reducing the carbon ‘intensity’ of its energy products by 6-8% by 2023, 20% by 2030, 45% by 2035 and 100% by 2050.
“More than 90% of our emissions come from the use of the fuels and other energy products we sell, so we must also work with our customers to reduce their emissions when that energy is used,” Shell said. “That means offering them the low-carbon products and services they need, such as renewable electricity, biofuels, hydrogen, carbon capture and storage and nature-based offsets.”
Shell is increasingly backing clean technologies, pledging to shift its electricity mix to 75% renewables, tripling its use of biofuels and doubling its generation of electricity.
It has increased the weight associated with GHG emissions management in its annual scorecard, used to determine annual bonus levels, including for the executive committee.
“The GHG emissions intensity metric and its weight (10%) will remain unaltered, but we will add a new metric that measures the execution of GHG-abatement projects with a weight of 5%,” the report said.
“It’s good that Shell has removed direct growth metrics from its executive remuneration, although indirect growth metrics remain,” says Mike Coffin, Senior Financial Analyst at Carbon Tracker.
“Lack of ambition”
But the strategy doesn’t go far enough, experts say, even though it has been reworked following a resolution filed by Follow This last year.
“What are Shell’s interim absolute emissions reduction targets? What is the respective role of industrialised and nature-based carbon capture, as well as offsets in the achievement of its GHG emission reduction targets? How does it seriously intend to make us believe these technologies will make up for Shell’s growth in the gas sector, considering the comparatively small sums being allocated?” asks Lucie Pinson, Founder and Executive Director of Reclaim Finance.
One of the main problems is that Shell is setting targets relating to carbon ‘intensity’. Its transition plan offers no hard cap on emissions or production. Furthermore, Shell actually plans for expansion into gas, adding more than seven million tonnes annually to its liquified natural gas (LNG) capacity by the mid-2020s – on top of its current 33 m/t.
ClientEarth’s recent Greenwashing Files study compared public messages by nine of the world’s biggest fossil fuel companies (including Shell) with “the reality of their carbon-intensive operations and products”.
Shell’s pledges envisage fossil fuel sales for the next 14 years and don’t support accelerated decarbonisation in line with the 1.5°C scenario outlined by the Paris Agreement, ClientEarth revealed.
“These companies need to stop suggesting they are part of the solution in their advertising, otherwise they leave themselves open to challenge,” said ClientEarth lawyer Johnny White.
Shell has also made a point to include a disclaimer in its strategy that “Shell only controls its own emissions” and not those of its customers, even though some of the customers’ emissions are directly associated with the energy products Shell sells them.
“Considering the lack of ambition in Shell’s climate plan, it looks like a diversion tactic – a last-ditch attempt by Shell to dissuade its investors from voting for the [Follow This] resolution. Investors should not be fooled,” Pinson tells ESG Investor.
Carbon offsetting – an unproven solution
For an energy transition strategy to be truly effective, many argue that corporates need to be dealing in absolute reductions rather than offsets.
“Shell’s goal to reduce the carbon intensity of Scope 3 emissions by 20% by 2030 falls short of the more than 90% target it should be aiming for in order to hit a Paris-aligned net-zero target. While carbon intensity indicators allow companies to scale up fossil fuel growth and doesn’t automatically imply Paris-aligned emissions reductions in absolute terms, Shell also plans to reduce its carbon intensity by 45% by 2035, meaning Shell is postponing the change for when it’s too late,” Pinson explains.
Expansion of its CO2 capture and storage (CCS) and ‘nature-based offsets’ capabilities also isn’t in line with the Science-Based Targets Initiative, which prohibits the counting of offsets in meeting near-term climate goals, ClientEarth noted in its study.
Moreover, negative emissions technologies haven’t been truly tested at scale, so their impact is “highly uncertain”, Coffin agrees. Relying on vast tree plantations also presents environmental challenges of its own, such as the disruption of wildlife already living in that space.
“I see quite a bit of sense in Shell’s strategy, which is to continue to dig up oil, sell oil and gas and then use the proceeds to invest in forests,” Trove’s Turner counters. “I’d rather Shell be the corporate selling that oil and gas than other corporates that aren’t doing good with the proceeds.”
Nonetheless, Kronick argues that such heavy reliance on carbon offsetting should be a warning sign to shareholders, and their votes in May should reflect their concern.
“The best possible outcome from the advisory shareholder vote would be that it doesn’t get strong support from investors, otherwise it would reinforce the signal that corporates can put forward a half-baked plan that’s largely dependent on either your customers or on offsetting. If investors largely support it, that would be disastrous – it would tell the industry that this is good enough, and it’s absolutely not good enough,” he says.
Action from policymakers
If the oil and gas industry is going to move towards rapid decarbonisation, then policymakers need to crack the whip, Turner says.
That means governments need to implement energy and carbon taxes and ban the sale of internal combustion engines, for example. Forcing corporates to seek viable alternatives to meet consumer demand, rather than expecting corporates to ‘do the right thing’, is essential.
Governments can also do more to back the promotion of renewable alternatives by helping to make them more financially viable. The more innovation, the more prices will become competitive and attractive to investors.
“And the more that big businesses are built up around renewables, the easier it is for governments to make more aggressive policy decisions,” Turner explains.
The oil and gas industry is undeniably a major contributor to the world’s current GHG emissions. A 2018 International Energy Agency report said that emissions from oil and gas operations were around 5,200 million tonnes, amounting to 15% of energy-related emissions.
With demand for natural gas set to grow by 3.2% in 2021, according to the IEA, investors are expected to intensify their focus on the impact of investee companies on the environment, alongside longstanding concerns about how the environment impacts their portfolios, both through increased engagement or voting on energy transition plans, such as the one put forward by Shell.
“What’s becoming increasingly clear is that the current rate of disclosure isn’t delivering the change we need. The more time corporates spend putting these plans together, the less time they have to actually achieve their targets,” Kronick says.