The editorial board
Royal Dutch Shell’s decision to set carbon emissions targets from next year is as welcome as it is overdue. The announcement was made as signatories to the Paris climate change agreement, which seeks to limit global temperature rises, gathered for the COP24 talks in Poland to try to agree rules on implementation. Like the Paris commitments themselves, Shell’s pledge and its plan to link 1,200 executives’ pay to progress against its targets raise the bar for everyone. Only six months ago, Ben van Beurden, Shell’s chief executive, was content to have an “ambition” to halve carbon emissions by 2050.
He dismissed hard targets as superfluous and worried about the lawsuits they might lead to. Shell’s turnround marks a victory for investors, including Robeco and the Church of England, which convinced Mr van Beurden that success in reducing emissions was contingent on adopting timetables and specific goals. More interestingly, Shell said the decision was an evolution that resulted from dialogue with investors, highlighting shareholders’ increasing power in pushing companies to make progress. Shell’s adoption of rolling three- to five-year emissions targets provides a clear model for other oil majors and will increase pressure on them to take comparable steps.
Much of this pressure will come, as it did for Shell, from investor alliances such as Climate Action 100+, which backed Shell’s decision. The group, which includes Legal & General Investment Management, Calpers and UBS Asset Management, pushes corporate polluters to cut emissions and improve disclosure on climate issues. It has more than $32tn in assets under management. With an oil major-sized notch in their belt, group members’ determination to have other carbon producers and emitters follow suit, and their influence, will only grow. Another reason these alliances are becoming more powerful is that they include unlikely bedfellows who find their investment interests are more closely aligned than ever before.
It has been easier than anyone expected for them to make common cause on climate issues. Hard-nosed investors such as BlackRock are worried that energy company operations are exacerbating global warming at the same time as global climate commitments are tightening, which could make them uneconomic. They find their interests converging with those of social justice and ethical investors, such as the Church of England, which focus on inter-generational effects but equally need good returns over the long term. The scale of the carbon emissions problem is staggering. The recent Intergovernmental Panel on Climate Change report warned that on current trends, global temperature increases will overshoot the Paris target of 1.5C, reaching 3C by 2100, with devastating consequences.
While Shell has set an example that other hydrocarbon-intensive industries such as utilities, carmakers and cement manufacturers should also emulate, it is a long way from becoming a low-carbon company. It still commits only 8 per cent of its annual capital expenditure budget of $25bn to clean energy projects. One way for Shell to prove its bona fides is to provide more detail on how executive pay will be linked to the new targets. The oil major could learn from BHP Billiton, which has explicitly linked several hundred executives’ pay to progress towards gender parity. Shell’s leadership is welcome, as is the new-found influence of investor alliances. Such groups should continue to hold companies to account. Lofty commitments will count for little unless they are effectively implemented.