As an indication of the increasing focus on environmental, social, and governance or “ESG” matters, one of the world’s largest oil & gas companies announced this week that it would incorporate Net Carbon Footprint targets in its executive compensation program.
There is a growing recognition that ESG matters can represent strategic risks for companies; as such, these factors have become an area of focus for institutional investors and the director community. Some companies (within the energy industry and more broadly) have begun to incorporate ESG metrics within their compensation programs (typically allowing for discretionary adjustments to annual bonuses to reflect the board’s assessment of the company’s ESG performance) as a way to manage these risks. Royal Dutch Shell is the first energy company to announce its intention to tie specific, measurable environmental goals to their long-term incentive plan. While the specific plan design and metrics are yet to be determined, this announcement is reflective of a potentially big step forward in the ESG-focused movement.
This announcement by Shell follows a relatively significant 2018 shareholder resolution co-filed by Follow This (a Dutch environmental group) and Share Action (an organization that promotes responsible investment), which requested that Shell set specific climate targets aligned with the Paris Climate Agreement. While this resolution was only backed by 5.1% of shareholder votes, this level of support was viewed as being a meaningful demonstration of the growing institutional investor focus on ESG matters.
Details of the announcement, which was made in a joint statement between Royal Dutch Shell plc and a group of institutional investors:
- In 2017, Shell announced its plans to reduce its Net Carbon Footprint by 20% by 2035 and by 50% by 2050
- “Net Carbon Footprint” is a measure of carbon intensity, and takes into account “full lifecycle emissions” from Shell’s operations, use of energy products by its customers, and those generated by third parties in the company’s supply chain
- A group of institutional investors (led by Robeco and the Church of England Pensions Board, and including Eumedion and the European Institutional Investors Group on Climate Change) engaged with Shell in order to encourage its commitment to reducing its Net Carbon Footprint by incorporating targets into their executive compensation programs
- This group of investors was acting on behalf of the Climate Action 100+ initiative, which seeks to engage with greenhouse gas emitters and other companies that can drive the clean energy transition and help achieve the goals of the Paris Climate Agreement (301 investors representing a total of US$32 trillion in assets under management have signed on to the initiative to-date)
- A joint statement released by Shell and the institutional investors lists the following steps that Shell plans to take:
- Set and publicize specific three- to five-year Net Carbon Footprint reduction targets which correspond to the longer-term reduction goal of 50% by 2050
- Subject to shareholder approval at the 2020 Annual General Meeting, Shell will incorporate these Net Carbon Footprint reduction targets in the long-term incentive program (final plan design, including appropriate remuneration structure, measures, and metrics are still to be determined)
- Compensation for an estimated 1,300 high-level employees could be impacted by this change
- Publicize progress towards lowering its Net Carbon Footprint on an annual basis
- Disclose other metrics and targets used to assess and manage climate-related risks, in line with the recommendations form the Taskforce on Climate-related Financial Disclosures (“TCFD”)
- Review membership in relevant trade associations in order to ensure these do not undermine the company’s support for the objectives of the Paris Climate Agreement
For more, see the joint statement released by the institutional investors on behalf of Climate Action 100+ and Royal Dutch Shell plc here.