Royal Dutch Shell tries to reckon with climate change

INTERNATIONAL OIL companies wrestle with the clash between their duty to deliver value to shareholders and the fact that how they produce those returns threatens the planet. A key question is whether they can reduce greenhouse-gas emissions without gutting their businesses. On December 3rd Royal Dutch Shell went further than any other oil major so far in insisting it could. The firm announced that it would set specific targets for reducing carbon emissions every three to five years, with the goal of shrinking its net carbon footprint by about half by 2050.

Shell will also ask shareholders to reward executives for managing a transition to cleaner energy, though the details are still to be worked out. Remarkably, its targets will cover not only emissions from its own production of oil and gas, but from all cars, lorries, planes and factories that eventually burn the stuff. Shell will use sales of its products to estimate their subsequent emissions. Other changes include reviewing ties with lobbying groups bent on undermining action on climate change (the oil-and-gas industry spent $126m lobbying in America last year; only four other industries spent more). These steps are unprecedented—and a reminder of how far the rest of the industry has to go.

Oil majors, despite their critics, remain a staple of investment portfolios. They pay large, reliable dividends. Shell has not cut its dividend since the second world war. Far from fleeing them, the biggest 20 institutional investors globally account for a rising proportion of their shareholders. Last year they held 27% of the majors’ shares, up from 24% in 2014.

Nevertheless, shareholder resolutions on climate have become a common feature of annual meetings. Since 2014 the number of votes on such resolutions has more than doubled. A year ago 310 investors concerned about environmental damage, managing a whopping $32trn between them, launched a group called Climate Action 100+ to co-ordinate efforts. Oil majors now express support for the Paris climate agreement. Their bosses lead the Oil and Gas Climate Initiative, a voluntary effort to lower emissions from their operations.

Still, oil chiefs take very different views of how dramatically firms should evolve. Climate-related strategies are starting to diverge. For instance, BP spent nearly $13m this year to defeat a ballot initiative for a carbon tax in Washington state. Some companies, including Shell, have mostly divested their holdings in oil sands, one of the most carbon-intensive sources of oil, but ExxonMobil remains a big owner.

Shell’s own announcement amounts to a volte-face. Its chief executive, Ben van Beurden, recently dismissed long-term binding targets on carbon as “foolhardy”. Shell would be vulnerable to lawsuits if it missed the goals, he said. But after talks with investors, led by Robeco, an asset manager, and the Church of England Pensions Board, ultimately overseen by the Archbishop of Canterbury, Justin Welby, Shell agreed to set short-term goals in the service of a longer-term ambition. That it can adjust its targets, says one energy lawyer, lowers its legal risk. Oil peers will be watching to see if Mr van Beurden can protect both the planet and his firm’s dividend.

Correction (January 2nd 2019): This article previously described Robeco as a hedge fund. It is an asset manager which does not run hedge funds itself. This has been corrected.