Climate change: Active engagement with Shell

Strategy:

• Companies should ensure their climate commitments are aligned with the goals of the Paris Agreement. This requires their strategies to be defined based on a Paris-aligned scenario and based on science (including “Scope 3” indirect emissions). Beyond long-term goals we require companies to define intermediary emissions reduction targets (on a 5 to 10 years horizon), with clear and communicated progress milestones. As part of this, we expect companies to adopt and publish absolute GHG emissions reduction targets for scope 1 and 2, and absolute and or relative (i.e., intensity-based) targets for scope 3;
• We also ask companies to integrate their value chain – upstream and especially downstream – in their climate strategy, a necessary step to achieve net zero for scope 3 emissions;
• While the transition is first a demand transition, enabled by the development of alternatives to oil and gas products, we will pay attention to supply trends and notably companies’ upstream greenfield projects. The aim is to better understand the overall production profile, its path relative to demand trends, and its contribution to coal substitution.

Transparency: We require disclosures around capital expenditure plans to be consistent with international transition pledges, including reporting on their progress;

Governance: Companies should align executive remuneration to climate change objectives

LNG – a market where Shell is already the largest player – and selected low carbon products will be further developed. Shell has also strong ambitions in carbon sequestration. Shell has set itself a very demanding goal by targeting to be net zero above and beyond its scope 3 perimeter, aiming at a much larger self-defined net carbon footprint. However, we are concerned by the lack of absolute Scope 3 emissions reduction targets and by what we see as an excessive (relative to peers) reliance on nature-based offsets even though they retired their former 2030 target. In addition, in June 2023 (hence after the AGM), Shell announced a scale down of its low-carbon investments, from 33% of total investments in 2022 to 15%-20% over 2023-25, opening questions on a broader revision of Shell’s transition strategy.

Following up on June 2023 updates, Shell provided more information on their revised strategy on 27 March 2024, with a focus on higher-margin projects, steady oil output and growth in production of natural gas to enhance returns and potentially close valuation gap against US rivals.

While remaining committed to net zero by 2050, as part of this new strategy, Shell lowered its 2030 Net Carbon Intensity target (“NCI”), which represents the average intensity, weighted by sales volumes, of the energy products sold by Shell, from 20% to 15-20% and removed the most ambitious 2035 NCI target of a 45% reduction, citing expectations for strong liquefied natural gas (LNG) demand, its exit from the b-to-c power market and uncertainty in the energy transition.

Shell presented this change as “a strategic shift” to focus less on selling electricity, including renewable power, given a profitability described as too low and arguing that a necessary investment in gas was due considering the sustained demand for fossil fuels and to allow for coal displacement. The evolution in the strategy is reflected in the remuneration policy for Shell’s executives, which will now rewards LNG sales instead of low carbon products sales or building renewables.

As part of these announcements, Shell also set a new target for reducing absolute scope 3 emissions – though only from oil products, aiming for a 15-20% reduction by 2030. These reductions, however, will be offset by Shell’s plans to expand production of fossil LNG by 20-30% by 2030. The company has no plan at this stage to set a similar reduction target on LNG activities, or more globally on their activities (as done by one of their peers for instance which has not set a natural gas scope 3 target but has set a cap for its total scope 3 emissions).

As rationale for the evolution in its strategy, the Company argues that without changes in demand and the way in which customers use energy, Shell’s financial strength will be materially affected, limiting its ability to generate value for shareholders, which has been a key component of the Company’s recent promise.

In this context, we believe more clarity on how Shell is working with consumers to reduce these emissions should be provided to shareholders, in response to the requests the latter have expressed over time. This concern is exacerbated by lobbying activities, currently more focused on developed markets. The large presence of Shell in emerging markets raises questions on the increasing demand coming from there. Lobbying efforts that perpetuate fossil fuel demand or prevent the advancement of more sustainable and ambitious Paris Agreement-aligned policies may undermine Shell’s capacity to achieve its objectives and elevate systemic risks for investors. Following discussions with different stakeholders, Shell finally committed to disclose more information in five to ten emerging countries that are important to its strategy. This decision is welcome, even if the quality of the disclosure and the elements that will be included in future reporting will need to be evaluated in due time to consider it as marker of progress. 

In 2023, our main concerns related to lack of absolute Scope 3 emissions reduction targets as well as a high reliance (relative to peers) on carbon offsets. Hence, we decided to oppose the company’s progress report submitted at the 2023 AGM. This followed two years of support on management sponsored climate-related proposals, illustrating the fact that we aim to accompany investee companies in their transition while not shying away from opposing plans in case absence of meaningful progress is observed over the years. 

With around 20% of votes against their Transition report for two years in a row, in 2022 and 2023 and multiple calls from investors to take further action, we believe Shell’s ambition on climate, as described above, fails to transparently address several issues in their strategy already highlighted numerous times by shareholders. 

Considering AXA IM’s Net Zero commitment and significant scrutiny applied on the financial sector’s approach to the Oil & Gas sector, and in application of our Climate Risks policy, we have escalated our concerns further in the perspective of the 2024 AGM, by co-filing Follow This resolution, considering that the issues at stake for the Oil & Gas sector continue to require exemplary practices and transparency. By doing so, we are joining 26 other institutional investors with €4 trillion in assets under management. Consistently, we opposed the Transition report presented by Management for the third year in a row. 

We will continue to engage with Shell, focusing in particular on their Scope 3 targets and how those align with evolutions in their business strategy. We will also aim to discuss lobbying practices, as well as disclosure mechanisms.