CDP Climate Change 2018 Information Request Royal Dutch Shell plc

Transcription

1 CDP Climate Change 2018 Information Request Royal Dutch Shell plc C0 Introduction C0.1 (2017: CC0.1) Give a general description and introduction to your organization. For the content of this submission, please find a CAUTIONARY NOTE under C14/C-FI. NOTE: On our online submission is available as a pdf document. The pdf contains a few additional comments complementing some of our responses as the online portal did not offer an opportunity to log those (sections: C1.2, C4.3a, C-OG9.2c, C-OG9.2d). Annual Report, p. 10: Royal Dutch Shell plc (the Company) is a public limited company registered in England and Wales and headquartered in The Hague, the Netherlands. BUSINESS MODEL Shell is an international energy company with expertise in the exploration, development, production, refining and marketing of oil and natural gas, as well as in the manufacturing and marketing of chemicals. We are one of the world s largest independent energy companies in terms of market capitalisation, cash flow from operating activities, and production levels. Annual Report, p. 11: ORGANISATION We describe below how our activities are organised. Integrated Gas, Upstream and Downstream focus on our seven strategic themes (see Strategy and outlook on page 08, Annual Report (AR) 2017). Our Projects & Technology organisation manages the delivery of Shell s major projects and drives research and innovation to develop new technology solutions. INTEGRATED GAS (INCLUDING NEW ENERGIES) This organisation covers two strategic themes: Integrated Gas, which is a cash engine; and New Energies, which is an emerging opportunity. Integrated Gas manages LNG activities and the conversion of natural gas into GTL fuels and other products. It includes natural gas exploration and extraction, when 1

2 contractually linked to the production and transportation of LNG, and the operation of the upstream and midstream infrastructure necessary to deliver gas to market. It markets and trades natural gas, LNG, crude oil, electricity and carbon-emission rights and also markets and sells LNG as a fuel for heavy-duty vehicles and marine vessels. In New Energies, we are exploring emerging opportunities and are already investing in opportunities where we believe sufficient commercial value is available. We focus on new fuels for transport, such as advanced biofuels, hydrogen and charging for battery-electric vehicles; and power, including from low-carbon sources such as wind and solar as well as natural gas. UPSTREAM Our Upstream organisation covers three strategic themes: Conventional Oil and Gas, which is a cash engine; Deep water, which is a growth priority; and Shales, which is an emerging opportunity. It manages the exploration for and extraction of crude oil, natural gas and natural gas liquids. It also markets and transports oil and gas, and operates the infrastructure necessary to deliver them to market. DOWNSTREAM Our Downstream organisation comprises two strategic themes: Oil Products, which is a cash engine; and Chemicals, which is a growth priority. It manages different Oil Products and Chemicals activities as part of an integrated value chain, including trading activities, that turns crude oil and other feedstocks into a range of products which are moved and marketed around the world for domestic, industrial and transport use. The products we sell include gasoline, diesel, heating oil, aviation fuel, marine fuel, biofuel, lubricants, bitumen and sulphur. In addition, we produce and sell petrochemicals for industrial use worldwide. Our Downstream organisation also manages Oil Sands activities (the extraction of bitumen from mined oil sands and its conversion into synthetic crude oil). PROJECTS & TECHNOLOGY Our Projects & Technology organisation manages the delivery of our major projects and drives research and innovation to develop new technology solutions. It provides technical services and technology capability for our Integrated Gas, Upstream and Downstream activities. It is also responsible for providing functional leadership across Shell in the areas of safety and environment, contracting and procurement, wells activities and greenhouse gas management. Our future hydrocarbon production depends on the delivery of large and integrated projects (see Risk factors on page 12, AR 2017). Systematic management of lifecycle technical and non-technical risks is in place for each opportunity, with assurance and control activities embedded throughout the project life cycle. We focus on the cost-effective delivery of projects through quality commercial agreements, supply-chain management, and construction and engineering productivity through effective planning and simplification of delivery processes. Development of our employees project management competencies is underpinned by project principles, standards and processes. A dedicated competence framework, training, standards and processes exist for various technical disciplines. In addition, we provide governance support for our non-shell-operated ventures or projects. 2

3 C0.2 (2017: CC0.2) State the start and end date of the year for which you are reporting data. Start date End date 01/01/ /12/2017 C0.3 (2017: CC0.3) Select the countries for which you will be supplying data. Country Australia, Canada, Germany, Malaysia, Netherlands, Nigeria, Singapore, United Kingdom, USA, Other: rest of the world, international waters. C0.4 (2017: CC0.4) Select the currency used for all financial information disclosed throughout your response. Currency US$ C0.5 (2017: CC8.1) Select the option that describes the reporting boundary for which climate-related impacts on your business are being reported. Note that this value should align with your consolidation approach to your Scope 1 and Scope 2 greenhouse gas inventory. Operational control Organizational activities: Oil and Gas (C-OG0.7) Which part of the oil and gas value chain does your organization operate in? Upstream Downstream Chemicals Biofuels Carbon capture and storage/utilization 3

4 C1 Governance Board oversight C1.1 (2017: CC1.1) Is there board-level oversight of climate-related issues within your organization? Yes C1.1a (2017: CC1.1a) Identify the position(s) of the individual(s) on the board with responsibility for climate-related issues. Position of individual(s) Please explain Board Chair Director on board Annual Report 2017, page 76, Letter of Board Chair: This year, the Board primarily focused on our three strategic aims: strengthening our world-class investment case including operational excellence and our financial framework, thriving through the energy transition and sustaining our societal licence to operate. In November 2017, our executive team communicated our progress on delivering these three aims and announced our net carbon footprint ambition. More information on Board meeting discussions can be found in the pages 76ff, and our Strategic Report provides more information on the strategic aims and our net carbon footprint ambition. Non-executive Director, Chair of Corporate and Social Responsibility Committee Role of Non-executive Directors, see AR 2017, page 78. Annual Report 2017, page 80: The Committee fulfils its responsibilities by reviewing a wide range of areas, including the management of health, safety, security, environmental and social impacts of projects and operations. It does this through a series of reviews of performance, audit findings and other specific areas, such as process safety. It also monitors major issues of public concern and Shell s strategy to address them, especially in respect of environmental and social issues, and matters regarding ethics and compliance. In addition, it provides input into the Shell Sustainability Report and reviews a draft of the report before publication. 4

5 The key topics discussed by the Committee in 2017 were the energy transition, net carbon footprint ambition, carbon dioxide and methane related developments,..., asset integrity and process safety. Chief Executive Officer (CEO) Annual Report 2017, page 80: The Executive Committee operates under the direction of the CEO in support of his responsibility for the overall management of Shell s business. The CEO has final authority in all matters of management that are not within the duties and authorities of the Board or of the shareholders general meeting. C1.1b (new) Provide further details on the board s oversight of climate-related issues. Frequency with which climate-related issues are a scheduled agenda item Governance mechanisms into which climate-related issues are integrated Please explain Scheduled - all meetings Reviewing and guiding strategy Reviewing and guiding major plans of action Reviewing and guiding risk management policies Reviewing and guiding annual budgets Reviewing and guiding business plans Setting performance objectives Monitoring implementation and performance of objectives Annual Report, page 62: Shell has a climate change risk management structure in place which is supported by standards, policies and controls. This includes the work of the Board, which discusses a number of regular agenda items, among them reporting on environmental topics. Throughout 2017, the Board held strategy sessions in the context of the changing global energy market, energy transition and climate change, and considered risks and opportunities of the current and future shape of Shell s portfolio for different timescales. The top priorities identified for 2018 in this area include the energy transition and implementation of our strategy for the New Energies business. The Board committees (see Corporate governance on page 80, AR 2107) play an important role in assisting the Board with regard to governance and management of climate change risks and opportunities. The responsibilities of the Corporate and Social Responsibility Committee (CSRC) include the review of the management of environmental and social impacts of projects and operations. In 2017, among the key topics were the energy transition, GHG emission targets, and other carbon 5

6 Overseeing major capital expenditures, acquisitions and divestitures Monitoring and overseeing progress against goals and targets for addressing climate-related issues dioxide (CO2) and methane-related developments, such as Shell s net carbon footprint ambition and guiding principles on reducing methane emissions. The Remuneration Committee (REMCO) is responsible for setting the Directors Remuneration Policy in alignment with strategy. In 2017, activities for REMCO included setting annual bonus performance measures and targets, for example, introducing GHG metrics in the scorecard following recommendations by the CSRC, and embedding the energy transition into the Chief Executive Officer s (CEO) personal performance targets. See Directors Remuneration Report on pages 94-95, AR The Shell employee scorecard structure for determining employees annual bonus in 2017 was consistent with the Executive Directors scorecard. The Audit Committee has key responsibilities in assisting the Board in fulfilling its oversight responsibilities in relation to areas such as the effectiveness of the system of risk management and internal control. Any concerns regarding improvement needed are promptly reported to the Board. The CEO is the most senior individual with accountability for climate change risk. C1.2 (new) Below board-level, provide the highest-level management position(s) or committee(s) with responsibility for climate-related issues. Name of the position(s) and/or committee(s) Responsibility Frequency of reporting to the board on climate-related issues Chief Executive Officer (CEO) Both assessing and managing climate-related risks and opportunities More frequently than quarterly Other C-Suite Officer, please specify [Executive Director Projects&Technology] Environmental, Health, and Safety manager [EVP Safety & Environment] Both assessing and managing climate-related risks and opportunities Both assessing and managing climate-related risks and opportunities More frequently than quarterly More frequently than quarterly 6

7 C1.2a (new) Describe where in the organizational structure this/these position(s) and/or committees lie, what their associated responsibilities are, and how climate-related issues are monitored. Annual Report 2017, p. 62/63: The CEO is the most senior individual with accountability for climate change risk. We have set up several dedicated climate change and GHG-related forums at different levels of the organisation where climate change issues are addressed, monitored and reviewed, and each Shell subsidiary has operational responsibility for implementing climate change policies and strategies. A senior manager the Executive Vice President for Safety and Environment reporting directly to an Executive Director (the Projects & Technology Director) is accountable, among other things, for oversight of GHG issues. This manager s department includes the dedicated Group Carbon team, which is accountable for monitoring and examining the strategic implications of climate change for Shell and the impact of developments in governmental policy and regulation. The Group Carbon team is responsible for preparing proposed policy positions based on analysis within Shell and external input. The team also ensures consistency in application of our core principles and policy tasks in interactions with policy makers. Reporting to the same manager is the HSSE & SP Assurance and Reporting team, which is accountable for the delivery of Shell s non-financial reporting and for auditing the businesses performance against our HSSE & SP Control Framework requirements, including climate change risk management. See Environment and society on page 58, AR Group Carbon also has oversight of Shell s GHG management programme and supports the different lines of business in embedding GHG management strategies. The team includes GHG project managers to guide the largest projects, which represent around 80% of all additional GHG emissions from new investments, in managing GHG-related content, from both a risk and an opportunity standpoint. Risk management at an asset or project level is a structured process of identifying and assessing risks, planning and implementing responses, monitoring, improving and closing out action items that have an impact on projects and assets objectives. Group Carbon support is provided for each relevant milestone and a formal sign-off process on abatement plans and targets is applied. Further support for embedding GHG risk management is provided by a global expertise team for GHG and energy management. This team is a network of subject-matter experts in GHG topics that works globally and across our lines of business. Team members are experts in their relevant disciplines, defining improvement areas globally and capturing and sharing best practices. The above-mentioned teams and experts have provided their input to shape a set of mandatory manuals and complementary guidance documents which are ultimately based on our HSSE & SP Control Framework. These documents provide guidance on how to monitor, communicate and report changes in the risk environment, and how to review the effectiveness of actions taken to manage the identified risks, including ways to: 7

8 ensure consistent assessment of climate risk across Shell; clarify expectations for risk management and reporting, including roles and responsibilities; strengthen decision making through better visibility and understanding of the climate risk by line of business; and enable integration of Shell s reporting. For more detail on our definition of risk categories and their relationship to different time horizons, see page 65, AR This structured approach supports the prioritisation of risks and opportunities. We actively monitor the GHG footprint of all our assets, as well as our products, to quantify future regulatory costs related to GHG or other climate-related policies. This allows us to effectively prioritise areas of greater concern and assess mitigation options and the most viable responses. Climate-related risks are analysed in context of other identified material risks. See Risk factors on pages 12-16, AR Please also refer to our Annual Report 2017, page 63, for our climate change management organogram. Employee incentives C1.3 (2017: CC1.2) Do you provide incentives for the management of climate-related issues, including the attainment of targets? Yes C1.3a (2017: CC1.2a) Provide further details on the incentives provided for the management of climate-related issues. Who is entitled to benefit from these incentives? Types of incentives Activity incentivized Comment Chief Executive Monetary Other: GHG Annual Report 2017, pages 99: Officer (CEO) reward intensity Annual bonus management The 2018 performance measures remain aligned with a number of our performance indicators (p. 23), and comprise of cash flow from operating activities, operational excellence and sustainable development measures. In 2017, the metrics covered around 60% of Shell s operated direct and energy indirect GHG 8

9 emissions. The GHG metrics in the 2018 scorecard have evolved and coverage has increased to close to 90% of the operated portfolio emissions. The refining and chemicals metrics will be retained and emissions coverage in Integrated Gas and Upstream will be measured on an intensity basis and expanded beyond flaring. Chief Financial Monetary Other: GHG Annual Report 2017, pages 99: Officer (CFO) reward intensity Annual bonus management The 2018 performance measures remain aligned with a number of our performance indicators (p. 23), and comprise of cash flow from operating activities, operational excellence and sustainable development measures. In 2017, the metrics covered around 60% of Shell s operated direct and energy indirect GHG emissions. The GHG metrics in the 2018 scorecard have evolved and coverage has increased to close to 90% of the operated portfolio emissions. The refining and chemicals metrics will be retained and emissions coverage in Integrated Gas and Upstream will be measured on an intensity basis and expanded beyond flaring. Other, please Monetary Other: GHG Sustainability Report 2017, page16: specify: senior reward intensity In 2017, sustainable development continued to account for 20% of the Executive Directors' annual bonus management and management scorecard, which helps determine the annual bonus for the Executive Directors. other employees Targets are set each year by the Board s Remuneration Committee and the outcomes against these targets are reported retrospectively in the Annual Report. The same annual bonus scorecard approach applies to senior management and other employees. The metrics on sustainable development in 2017 had equal weighting between our safety (10%) and environmental (10%) performance. The safety component covers personal and process safety and the environmental component includes greenhouse gas (GHG) emissions for the first time in three specific business areas: refining, chemical plants and flaring in upstream assets. In 2017, GHG metrics covered around 60% of direct and energy indirect emissions from our operated portfolio. 9

10 The GHG metrics in the 2018 scorecard have evolved and coverage has increased to around 90% of operated emissions. The refining and chemicals metrics will be retained and emissions coverage in upstream and midstream will be measured on an intensity basis and expanded beyond flaring. Please also refer to our Annual Report 2017, page 94, the letter from the Chair of the Remuneration Committee (extract): Our discussions with you around what are appropriate GHG targets for a company to set, how to drive internal improvements, and how to inform and report to external stakeholders on GHG-related matters, are evolving as understanding and methodologies mature. We believe it is important to have measures that are clear and simple to explain and understand. In 2017, the GHG scorecard measures focused on three specific business areas: refining and chemical plants in our Downstream business and flaring in our Integrated Gas and Upstream businesses, which covered approximately 60% of our direct and energy indirect operated emissions. For 2018, the GHG metrics will evolve and cover close to 90% of Shell s operated portfolio emissions. This operational focus on GHG emissions intensity in the short term will help to ensure the continued portfolio resilience to climate-related impacts as we prepare for a longer-term energy transition. C2 Risks and opportunities Time horizons C2.1 (new) Describe what your organization considers to be short-, medium- and long-term horizons. Time horizon From (years) To (years) Comment 10

11 Short-term 1 3 Note: CDP does not allow to quote our definition from our 2017 Annual Report: "up to around 3 years" for this time period (page 65). Detailed financial projections are developed and used to manage performance and expectations on a three-year cycle. This three-year plan is shared with the Board. Shell has a rigorous approach to understanding, managing and mitigating climate risks to its facilities. Shell also requires each business and function to monitor, communicate and report changes in the risk environment and the effectiveness of actions taken to manage identified risks on an ongoing basis. This is outlined in a toolkit for risk management including our Risk Management Manual and complementary guidance documents that cover specific aspects such as climate risk. Mediumterm 3 10 Note: CDP does not allow to quote our definition from our 2017 Annual Report: "3 years up to around 10 years" for this time period (page 65). The majority of production and earnings expected to be generated in this period come from our existing assets. Long-term 10 Note: CDP does not allow to quote our definition from our 2017 Annual Report: "beyond around 10 years" for this time period (page 65). For this period, the current Shell portfolio is not representative of our performance or the potential risks, and questions emerging on the thematic structure of the portfolio guide decision making and risk identification. Management processes C2.2 (2017: CC2.1) Select the option that best describes how your organization's processes for identifying, assessing, and managing climaterelated issues are integrated into your overall risk management. Integrated into multi-disciplinary company-wide risk identification, assessment, and management processes C2.2a (2017: CC2.1a) Select the options that best describe your organization's frequency and time horizon for identifying, and assessing climate-related risks. Frequency of monitoring How far into the future are risks considered? Comment 11

12 Annually > 6 years Shell has a global approach to climate change risk management, covering all regions worldwide where we operate or explore. Risk management procedures about climate change risks and opportunities are reported to Board or individual/sub-set of the Board or committee appointed by the Board. Shell s approach to risk management includes a variety of processes. The company s Control Framework is at the basis of these processes. Risks and opportunities are assessed at Group, business and asset levels. C2.2b (new) Provide further details on your organization s process(es) for identifying and assessing climate-related risks. Annual Report 2017, page 62 Climate change and risks resulting from GHG emissions have been identified as a significant risk factor for Shell and are managed in accordance with other significant risks through the Board and Executive Committee. Shell has a climate change risk management structure in place which is supported by standards, policies and controls. The dedicated Group Carbon team (formerly Group CO2), is accountable for monitoring and examining the strategic implications of climate change for Shell and the impact of developments in governmental policy and regulation. The Group Carbon team is responsible for preparing proposed policy positions based on analysis within Shell and external input. The team also ensures consistency in application of our core principles and policy tasks in interactions with policy makers. Group Carbon also has oversight of Shell s GHG management programme and supports the different lines of business in embedding GHG management strategies. The team includes GHG project managers to guide the largest projects, which represent around 80% of all additional GHG emissions from new investments, in managing GHG-related content, from both a risk and an opportunity standpoint. Reference Annual Report 2017, page 58 The HSSE&SP Assurance and Reporting team is accountable for the delivery of Shell s non-financial reporting and for auditing the businesses performance against our HSSE&SP Control Framework (CF) requirements, including climate change risk management. Risks and opportunities are assessed via the Shell Risk Assessment Matrix (part of the Shell HSSE&SP CF) that identifies consequences to people, assets, environment and reputation. Applied severity bands range from no damage/effect to massive damage/effect. Likelihood is reported on an increasing scale from Never heard of in the Industry to Has happened more than once per year at the location. Major installations are certified against internationally recognized environmental management system standards (e.g. ISO14001). Climate-related risks are analysed in context of other identified material risks. 12

13 Reference Annual Report 2017, page 63 Our portfolio exposure is reviewed annually against changing GHG regulatory regimes and physical conditions to identify emerging risks. We test the resilience of our portfolio against externally published future pathways, including a low emissions pathway. To test the resilience of new projects, we assess potential costs associated with GHG emissions when evaluating all new investments. Our approach generally applies a project screening value (PSV) of $40 (real terms) per tonne of GHG emissions to the total GHG emissions of each investment. This PSV is generally applied when evaluating our new projects around the world to test their resilience across a range of future scenarios and is periodically reviewed to account for new market and policy developments. The project development process features a number of checks that may require development of detailed GHG and energy management plans. High-emitting projects undergo additional sensitivity testing, including more detailed economic analysis on local GHG costs, demand sensitivity and the potential for later retrofitting of carbon capture and storage (CCS) facilities. In certain countries, these estimated GHG costs can exceed $100/tonne (in real terms) in the post 2030 environment, reflecting our presumption that governments will eventually take aggressive action to regulate GHG emissions in accordance with their Paris Agreement ambitions. Projects in the most GHG exposed asset classes have GHG intensity targets that reflect standards sufficient to allow them to compete and prosper in a more GHG-regulated future. These processes can lead to projects being stopped, designs being changed, and potential GHG mitigation investments being identified, in preparation for when regulation would make these investments commercially compelling. While monitoring emerging climate change plans, we consider the robustness of our activities against a range of scenarios, including the IEA scenarios. Shell s 2017 Annual Report (pages 62-63) provides further details on the organisation s processes for identifying and assessing climate-related risks. C2.2c (new) Which of the following risk types are considered in your organization's climate-related risk assessments? Risk type Relevance & inclusion Please explain Current regulation Relevant, always included Rising climate change concerns have led and could lead to additional legal and/or regulatory measures which could result in project delays or cancellations, a decrease in demand for fossil fuels, potential litigation and additional compliance obligations. If we are unable to find economically viable, as well as publicly acceptable, solutions that reduce our GHG emissions and/or GHG intensity for new and existing projects or for the products we sell, we could experience additional costs or financial penalties, delayed or cancelled projects, and/or reduced production and reduced demand for hydrocarbons, which could have a material adverse effect on our earnings, cash flows and financial condition. 13

14 Emerging regulation Relevant, always included Several countries that are important operating areas for Shell are in the process of developing additional climate change legislation which may include the use of emissions trading systems and carbon taxes, which could potentially increase compliance costs for Shell. Also, we expect that a growing share of our GHG emissions will be subject to regulation, resulting in increased compliance costs and operational restrictions. If our GHG emissions rise alongside our ambitions to increase the scale of our business, our regulatory burden will increase proportionally. We also expect that GHG regulation will focus more on suppressing demand for fossil fuels, either through taxes, fees, incentives to promote the sale of electric vehicles or even through the future prohibition of sales of new diesel or gasoline vehicles. This could result in lower revenue and, in the long term, potential impairment of certain assets. Technology Relevant, always included Our future performance depends on the successful development and deployment of new technologies and new products. Technology and innovation are essential to our efforts to meet the world s energy demands in a competitive way. If we do not develop the right technology and products, do not have access to such technology and products or do not deploy these effectively, there could be a material adverse effect on the delivery of our strategy and our licence to operate. We operate in environments where advanced technologies are utilised. While we take measures to ensure that such technologies and products are safe for the environment and public health based on today s knowledge, there is always the possibility of unknown or unforeseeable technological failures or environmental and health effects that could harm our reputation and licence to operate or expose us to litigation or sanctions. The associated costs of new technology are sometimes underestimated or delays occur. If we are unable to develop the right technologies and products in a timely and cost-effective manner, or if we develop technologies and products that adversely impact the environment or health of individuals, there could be a material adverse effect on our earnings, cash flows and financial condition. Legal Relevant, always included Rising climate change concerns have led and could lead to additional legal and/or regulatory measures which could result in project delays or cancellations, a decrease in demand for fossil fuels, potential litigation and additional compliance obligations. Shell operates in more than 70 countries that have differing degrees of political, legal and fiscal stability. This exposes us to a wide range of political developments that could result in changes to contractual terms, laws and regulations. Developments in politics, laws and regulations can and do affect our operations. Potential impacts include: forced divestment of assets; 14

15 expropriation of property; cancellation or forced renegotiation of contract rights; additional taxes including windfall taxes, restrictions on deductions and retroactive tax claims; antitrust claims; changes to trade compliance regulations; price controls; local content requirements; foreign exchange controls; changes to environmental regulations; changes to regulatory interpretations and enforcement; and changes to disclosure requirements. Any of these, individually or in aggregate, could have a material adverse effect on our earnings, cash flows and financial condition. Market Relevant, always included We are exposed to fluctuating prices of crude oil, natural gas, oil products and chemicals. The prices of crude oil, natural gas, oil products and chemicals are affected by supply and demand, both globally and regionally. Moreover, prices for oil and gas can move independently of each other. Factors that influence supply and demand include operational issues, natural disasters, weather, political instability, conflicts, economic conditions and actions by major oil and gas producing countries. Additionally, in a low oil and gas price environment, we would generate less revenue from our Upstream and Integrated Gas businesses, and, as a result, parts of those businesses could become less profitable, or could incur losses. Additionally, low oil and gas prices have resulted, and could continue to result, in the de-booking of proved oil or gas reserves, if they become uneconomic in this type of price environment. Prolonged periods of low oil and gas prices, or rising costs, can result in projects being delayed or cancelled. In addition, assets have been impaired in the past, and there could be impairments in the future. Reputation Relevant, always included Our reputation is an important asset. The Shell General Business Principles (Principles) govern how Shell and its individual companies conduct their affairs, and the Shell Code of Conduct instructs employees and contract staff on how to behave in line with the Principles. Our challenge is to ensure that all employees and contract staff, more than 100,000 in total, comply with the Principles and the Code of Conduct. Additionally, some groups are pressuring certain investors to divest their investments in fossil fuel companies. If this were to continue, it could have a material adverse effect on the price of our securities and our ability to access equity capital markets. Technology and innovation are essential to our efforts to meet the world s energy demands in a competitive way. While we take measures to ensure that such technologies and products are safe for the environment and public health based on today s knowledge, there is always the possibility of unknown or unforeseeable technological failures or environmental and health effects that could harm our reputation and licence to operate or expose us 15

16 to litigation or sanctions. An erosion of our business reputation could have a material adverse effect on our brand, our ability to secure new resources and our licence to operate. Acute physical Relevant, always included The health, safety, security and environment (HSSE) risks to which we, and the communities in which we work, are potentially exposed cover a wide spectrum, given the geographic range, operational diversity and technical complexity of our operations. These risks include the effects of natural disasters (including weather events), earthquakes, social unrest, personal health and safety lapses, and crime. If a major HSSE risk materialises, such as an explosion or hydrocarbon spill, this could result in injuries, loss of life, environmental harm, disruption of business activities, and loss or suspension of our licence to operate or ability to bid on mineral rights. Accordingly, this would have a material adverse effect on our earnings, cash flows and financial condition. Our operations are subject to extensive HSSE regulatory requirements that often change and are likely to become more stringent over time. Operators could be asked to adjust their future production plans, as the government of the Netherlands has done, affecting production and costs. We could incur significant additional costs in the future due to compliance with HSSE requirements or as a result of violations of, or liabilities under, laws and regulations, such as fines, penalties, clean-up costs and third-party claims. Therefore, HSSE risks, should they materialise, could have a material adverse effect on our earnings, cash flows and financial condition. Chronic physical Relevant, always included Increased local air temperatures could impact Shell s plants efficiency. Global rising sea levels could also impact Shell s coastal facilities (e.g. refineries, ports, terminals etc.) and our offshore platforms. Global changes in the global hydrological cycle could impact Shell s assets, for example by causing flooding, or making access to suitable quantities of water to run a particular facility problematic. Tropics: changes in sea temperature could affect future tropical cyclones. Upstream Relevant, always included We are exposed to fluctuating prices of crude oil, natural gas, oil products and chemicals. In a low oil and gas price environment, we would generate less revenue from our Upstream and Integrated Gas businesses, and, as a result, parts of those businesses could become less profitable, or could incur losses. Also, the World Bank has announced plans to stop financing upstream oil and gas projects in Similarly, according to press reports, other financial institutions also appear to be considering limiting their exposure to certain fossil fuel projects. Accordingly, our ability to use financing for future projects may 16

17 be adversely impacted. This could also adversely impact our potential partners ability to finance their portion of costs, either through equity or debt. Downstream Relevant, always included Shell is exposed to fluctuating prices of crude oil, natural gas, oil products and chemicals. In a high oil and gas price environment, we could experience sharp increases in costs, and, under some production-sharing contracts, our entitlement to proven reserves would be reduced. Higher prices could also reduce demand for our products, which could result in lower profitability, particularly in our Downstream business. Accordingly, price fluctuations could have a material adverse effect on our earnings, cash flows and financial condition. C2.2d (2017: CC2.1b, CC2.1c) Describe your process(es) for managing climate-related risks and opportunities. Shell s prioritisation of risks and opportunities follows a structured approach. We actively monitor our portfolio GHG footprint of all assets as well as our products to quantify future regulatory costs related to GHG or other related climate policies. This allows us to effectively prioritize areas of greater concern and assess mitigation options and the most viable responses. For planned major projects, emissions profiles are estimated and financial exposure from GHG regulations is assessed. All investment projects, as well as existing operations that undergo substantial modifications, are required to generally apply a project screening value (PSV) of $40/tonne CO2e. This PSV is periodically reviewed to account for new market and policy developments. Mitigation options for GHG risks are prioritized and managed by looking at cost-effective ways based on bespoke abatement curves that quantify impact as well as economic attractiveness. This includes considering the potential for CCS in the design of new projects. Actions to mitigate the key exposures and future mitigation options are agreed with the businesses and incorporated into their plans. For long term planning, Shell disaggregates its portfolio into a series of strategic themes. Asset classes in each of the themes have a 2025 GHG intensity aspiration and roadmap based plans, with a granulated review of GHG related risks and opportunities to show the activities needed to achieve the guiding aspiration. We actively rank and monitor the prioritisation of long term opportunities that might be benefited rather than threatened by climate change regulation, based on the fit with our own competences, the potential materiality of the activity and its economic returns. Our main opportunity related contributions to reducing GHG emissions, both our own and helping our customers emit less include: bring cleaner-burning natural gas to a wider market; supply more biofuels; progress Carbon Capture and Storage (CCS) technologies; and invest in lower carbon alternatives such as hydrogen, wind and solar. 17

18 Risks and opportunities are assessed via a single Control Framework (CF) that is designed to manage rather than eliminate the risk of failure to achieve business objectives at the company level. It therefore only provides reasonable assurance against material misstatement or loss. The CF applies to all wholly-owned Shell companies and ventures/other companies where Shell, directly or indirectly, has a controlling interest. For new projects, the CF defines the Opportunity Realisation Process that requires assurance at specific stages of the process and outlines the required governance. A comparable process is in place for existing assets. A dedicated department has the responsibility of actively monitoring company levels emissions and GHG intensity. This includes a dedicated GHG Project Manager to guide the largest projects, representing around 80% of all additional GHG from new investments, in managing GHG-related content, from both a risk and an opportunity standpoint. Risks are assessed for likelihood of occurrence and impact on Shell (financial/non-financial terms). At the asset level, risks and opportunities are assessed via the Shell Risk Assessment Matrix (part of the Shell HSSE&SP CF) that identifies consequences to people, assets, environment and reputation. Applied severity bands range from no damage/effect to massive damage/effect. Likelihood is reported on an increasing scale from Never heard of in the Industry to Has happened more than once per year at the location. Major installations are certified against internationally recognized environmental management system standards (e.g. ISO14001). The risks and opportunities of climate change are assessed for new assets or projects in development by considering a project screening value of GHG emissions at generally $40/tonne in all investment decisions. Improving the energy efficiency of the facilities we operate is one of the ways we manage our greenhouse gas (GHG) emissions. The main metric is energy intensity, the amount of energy consumed for every unit of output. Shell-operated facilities and proposed projects that generate more than 50,000 tonnes of GHG emissions a year are required to produce a GHG and energy management plan with annual updates. These plans must include the sources of GHG emissions, as well as a forecast of expected emissions at the site for at least 10 years, and must identify options for improving energy efficiency or reducing emissions. Risk disclosure C2.3 (2017: CC5.1) Have you identified any inherent climate-related risks with the potential to have a substantive financial or strategic impact on your business? Yes C2.3a (2017: CC5.1a, CC5.1b, CC5.1c) Provide details of risks identified with the potential to have a substantive financial or strategic impact on your business. Identifier Where in the value chain does the risk driver occur? Risk type Primary climate-related risk driver Type of financial impact driver Company- specific description Time horizon 18

19 Risk 1 Direct operations Transition risk Policy and legal: Mandates on and regulation of existing products and services Policy and legal: Increased costs and/or reduced demand for products and services resulting from fines and judgments Rising climate change concerns could lead to additional regulatory measures, such as explicit and implicit GHG policies deployed globally. If we are unable to find economically viable, as well as publicly acceptable, solutions that reduce our GHG emissions and/or GHG intensity for new and existing Medium-term projects or products, we could experience additional costs or financial penalties, delayed or cancelled projects. Likelihood Magnitude of impact Potential financial impact Explanation of financial impact Management method Cost of managem ent Comment About as likely High As disclosed in our recently Shell has a rigorous approach to Relevant teams are involved as not (2018) released Shell Energy understanding, managing and on working on wide and Transition report (page 19), at mitigating climate risks in assets and varied CO2 related activities, our current CO2 emission projects. Our approach generally such as supporting the levels, we estimate that a $10 applies a project screening value (PSV) implementation of our per tonne increase in global of $40 (real terms) per tonne of GHG policies within the business. CO2 prices would result in a emissions to the total GHG emissions Furthermore, our business reduction of about $1 billion of each investment. This incentivises strategy supports: supplying in Shell s pre-tax cash flows. investments in GHG abatement, more natural gas, There is continued and highlights projects with the most progressing CCS, increased attention to climate exposure to rising carbon prices, helps implementing energy 19

20 change from all sectors of society. This attention has led, and we expect it to continue to lead, to additional regulations designed to reduce GHG emissions. Furthermore, we expect that a growing share of our GHG emissions will be subject to regulation. If our GHG emissions rise alongside our ambitions to increase the scale of our business, our regulatory burden will increase proportionally. screen early-stage opportunities. We have GHG and energy management plans at key sites to identify and document potential ways to reduce GHG emissions. High-emitting projects undergo additional sensitivity testing. Projects in the most GHG-exposed asset classes have GHG intensity targets that reflect standards sufficient to allow them to compete and prosper in a more GHG regulated future. This can lead to projects being stopped, designs being changed, and potential GHG mitigation investments being identified, in preparation for when regulations would make these investments commercially compelling. Such considerations, e.g., influenced Shell s decision to invest in a gas gathering system to reduce our flaring activities. In Iraq, the Majnoon facility (Shell interest 45%) captured about 44% of associated gas that otherwise would have been flared in The gas was exported to a local power plant for electricity generation. efficiency measures in our operations, developing new fuels for transport, and participating throughout the power value chain. In 2016, we formed our New Energies business to explore lowercarbon energy opportunities with clear commercial value. New Energies is an emerging opportunity, in which we plan to invest on average $1-2 billion a year until 2020 as we look for commercial investments that build on our strengths in new and fastgrowing segments of the energy industry. It focuses on two main areas: new fuels for transport and power. 20

21 Identifier Where in the value chain does the risk driver occur? Risk type Primary climate-related risk driver Type of financial impact driver Company- specific description Time horizon Risk 2 Direct operations Transition risk Policy and legal: Policy and legal: Several countries that are important Short-term Increased pricing Increased operating operating areas for Shell are in the of GHG emissions. costs (e.g., higher process of developing additional climate compliance costs, change legislation which may include increased insurance the use of emissions trading systems premiums). and carbon taxes, which could potentially increase compliance costs for Shell. Likelihood Magnitude of impact Potential financial impact Explanation of financial impact Management method Cost of management Comment Virtually Medium-low Phase four of the EU Shell has a rigorous approach to It is not possible to come certain Emissions Trading understanding, managing and up with specific costs of System (ETS) will see mitigating climate risks in our assets. We management, as the facilities having to reflect future regulatory costs by relevant teams are also buy at auction an generally applying a common $40/tonne involved in many other CO2 increasing percentage project screening value (PSV) to test the related activities, such as of allowances for resiliency of new projects across a range supporting the compliance. Current of future scenarios. This GHG cost could implementation of our carbon price EUR vary regionally. In certain countries, policies within the business. 9.68/ tonne CO2e as these estimated GHG costs can exceed Our business strategy of February $100/tonne (in real terms) in the post supports: supplying more ( environment, reflecting our natural gas; progressing 21

22 ion.com/en/?option= com_etsmap&task=ex port&format=pdf&lay out=list&systems[]=4 3). Several countries (e.g. South Africa, Canada) are developing climate change legislation which will introduce CO2 costs and impact financial performance. presumption that governments will eventually take aggressive action to regulate GHG emissions in accordance with their Paris Agreement ambitions. Shell project development processes features several checks that may require development of detailed GHG and energy management plans. These processes can lead to projects being stopped, designs being changed, and potential GHG mitigation investments being identified, in preparation for when regulation would make these investments commercially compelling. It also incentivizes investments in GHG abatement, highlights projects with the most exposure to rising carbon prices and helps screen early-stage opportunities. Projects in the most GHGexposed asset classes have GHG intensity targets that reflect standards sufficient to allow them to compete and prosper in a more CO2 regulated future. CCS; producing low-carbon energy including biofuels; improving energy efficiency in operations and participating throughout the power value chain. One example of a cost of management is installing Cogeneration. The economics of cogeneration activities are variable and highly dependent on local electricity prices. As such, it can provide effectively negative abatement costs (where the installation is profitable), or high abatement costs (where it represents a net cost); e.g. external analysis from McKinsey show cost of cogeneration for downstream assets estimated around 10/tCO2. 22