Question

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“Shell Is First Energy Company to Link Executive Pay and Carbon Emissions” (Source: Business Law Newsletter, January 2, 2019)

According to the article, Royal Dutch Shell is giving its executives a powerful new reason to care about the environment.

The Anglo-Dutch energy firm said recently that it will establish short-term carbon emissions targets starting in 2020 after coming under pressure from investors. In an industry first, it plans to link executive pay to hitting the targets.

Major shareholders including the Church of England and Robeco have demanded that Shell do more to tackle emissions. They say its earlier goal of cutting carbon emissions by half by 2050 did not go far enough.

Shell said in a statement that it would set carbon reduction goals that cover periods of three to five years. The targets will be set on an annual basis and run to 2050.

The oil company did not set out specific carbon benchmarks. And it said that shareholders would not vote on changes to executive remuneration until 2020.

Climate Action 100+, a group of 310 investors with over $32 trillion in assets under management, said in a joint statement with Shell that it strongly supported the company in taking “these important steps.”

Shell made the announcement as the United Nations’ annual talks on climate change got underway in Poland.

Shell said it would be the first major energy company to link executive compensation and carbon goals. Crucially, it’s committing to cut emissions generated by both its activities and the products it sells.

“That Shell has now embedded its ambition in its remuneration policy offers confidence that Shell is really committed to it,” said Corien Wortmann, chair of the pension fund ABP.

Moves by major corporations to reduce carbon emissions should help governments meet targets established under the Paris Climate Agreement, which seeks to keep rises in global temperatures below 2 degrees Celsius.

The UN Intergovernmental Panel on Climate Change warned in October that the planet will reach the crucial threshold of 1.5 degrees Celsius by as early as 2030, precipitating the risk of extreme drought, wildfires, floods and food shortages for hundreds of millions of people. It said companies and governments must act faster.

Emma Howard Boyd, chair of the UK Environment Agency, praised Shell on Monday for moving to set short-term targets.

“We hope that this unique joint statement between institutional investors and an oil and gas major, will inspire other leaders to take bold action,” she said in a statement. “We would encourage the rest of the sector to follow Shell’s lead.”

Shell announced in 2016 that it would link greenhouse gas emissions to executive compensation.

It isn’t the only Big Oil company to come under pressure from investors over the environment. Last year, US-based ExxonMobil agreed to reveal the risks it faces from climate change and the global crackdown on carbon emissions.

Respond to the following questions:

2. Comment on Royal Dutch Shell’s plan to link executive pay to the achievement of carbon emissions targets.

3. In your reasoned opinion, which is the most preferable option in terms of carbon emissions:

a) the government mandating that energy companies like Royal Dutch Shell comply with heightened carbon emissions targets established by the government;

b) energy companies like Royal Dutch Shell establishing their own heightened carbon emissions targets and methods to ensure reaching such targets; or

c) doing nothing other than complying with existing regulatory standards established by individual countries ?

Explain your responses.

Answer 1

Answers

2) In an industry driven by targets, its a brilliant move to link executive pay to the achievement of carbon emissions targets. The move is strategic in many ways, as listed down below :

• Shell was able to contain the mounting investor pressure over environmental concerns, with this move. Not only that, Shell manages to set a benchmark for the rest of the oil and gas sector, by pioneering such initiative.
• The move is strategic because it ensures executives are conscious about their daily decision making process. To ensure that executives could save up on carbon emissions and meet their targets, they would be conscious to take decisions which do not adversely impact the environment. Even small decisions like opting to conduct meetings over video conferences instead of flying down to places (and hence saving carbon emission) could result in huge savings, both to the environment as well as to the company.

3) In my opinion, government mandates i.e. Option A works the best in such case, in order to ensure large scale deployment of such initiatives and meeting energy saving goals. Even today, while Shell may have opted to do this, there's no regulatory authority overseeing its efforts or for that matter, other companies in the oil and gas sector, are not mandated to follow the lead. This in essence, does not provide as much environmental relief as much would have been possible, had the government mandated the same.