Shell Sustainability Report: from best-practice to mainstream

Shell Sustainability Report: from best-practice to mainstream

Company:

Shell is a global group of energy and petrochemical companies employing 87,000 people in more than 70 countries. Shell started sustainability reporting in 1997 and has published yearly sustainability reports ever since. Shell is active in three sectors: Downstream, Upstream and Projects & Technology. Upstream searches for and recovers crude oil and natural gas, operates the infrastructure to deliver oil and gas to market, liquefies and transports natural gas, converts gas to liquid products, and extracts bitumen from oil sands for conversion into synthetic crude oil. Downstream manufactures, supplies and markets oil products and chemicals worldwide. Projects & Technology manages the delivery of Shell’s major projects and drives its research and innovation program to create technology solutions.

 

Content:
Shell reports data and information in its sustainability report, on the website, in its financial report and in the Form 20F (mainly concerning environmental and social risk management). Nice features are the download manager and the interactive chart tool that enables readers to select the topics of their interest. In this assessment, we have focused on the sustainability report. The report covers the majority of topics. However, additional contextual information and information on the UN Global Compact and the Millennium Development Goals are only available on the website. In order to keep the sustainability report slim, it is understandable to publish part of the information on the website. However, I would recommend providing more direct links in the report to additional information posted on the website and in the financial report.

 

Although the report is easy to read, the language is easy to understand and the layout is easy on the eye, I still got ‘lost’ reading the report. This had to do with my main point of criticism: an overall and all-encompassing strategy for sustainable development is not clearly disclosed. It remains unclear what Shell’s strategic sustainable development targets and priorities are. Also, the link between stakeholder needs and concerns, strategic challenges and the assessment of materiality is not detailed and not completely clear. As a result of this, the report is somewhat unstructured (with data presented seemingly randomly under either ‘Our activities’ or ‘Our performance’) and it seems that topics and data are somewhat haphazardly included or included from a historical point of view.

 

Shell uses a materiality assessment to determine the most material topics in the report. Shell was one of the first to adopt such an approach several years ago. Currently, all mature reporters globally are reporting their materiality assessment and materiality matrix. They provide detailed insight in the stakeholder dialogues performed, the topics and concerns raised, the response of the company and how this is prioritized and included in the materiality assessment. A good example I often use in my presentations is the 2010 report of AU Optronics. AU Optronics provides a one-page overview of concerns raised by stakeholders, a prioritization by the company and how this is translated into a materiality matrix. Currently, the materiality assessment Shell reports does not show the maturity and detail one may expect of a company like Shell, and it lacks the transparency materiality assessments of other leading companies display. For instance, I would expect more information on the stakeholders assessed, the topics discussed and what topics were included resulting from this exercise and what topics are reported on the website or not reported at all. As mentioned earlier, the direct link with strategic ambitions and/or strategic targets is therefore unclear.

 

Shell provides a lot of data regarding relevant indicators, including previous years, and transparency on limitations in the data. All data can be separately downloaded in Excel format. The selected indicators seem relevant for a company with the profile of Shell. But again, it is unclear how the selected indicators relate to the overall strategy and how these indicators measure the progress against the strategic ambitions. Also, trends and changing data relationships are not always explained, nor is performance being linked to (sector) benchmark information and/or other contextual information.

 

Communication:

The report is easily accessible on the website and fortunately not too big with 44 pages. As with earlier Shell reports, the content is easy and nice to read with not too much jargon and lots of visuals and graphics. I always favor overviews of performance data like the ones included on pages 36 and 37. The fact that data is comparable from 2003 onwards, greatly improves the insight in the performance of Shell in relation to the chosen indicators. I especially like the visual on page 1, as it provides a clear overview of Shell’s activities and the interrelatedness between them. However, it would be best-of-class to supplement the visual with an overview of the value chain, depicting the products and services Shell provides, the impact that is generated and how Shell is mitigating these impacts. Good examples are to be found in Asia again (e.g. Marubeni) and the mining sector (e.g. AngloAmerican).

Throughout the report, many stakeholders are quoted, which makes the report nicer to read and more credible, and enhances the stakeholder inclusiveness. Most of the stakeholders reflect on a certain part of sustainable development and express their concerns and hopes. Also, some stakeholders state the fact that they have provided Shell with recommendations. What is missing, however, is a response by Shell disclosing what the specific recommendations were and how these recommendations are addressed and/or followed up.

Shell reports in line with several relevant guidelines, such as UN Global Compact, IPIECA and the Global Reporting Initiative (GRI). The Shell report is in line with the highest application level, namely A. This implies that Shell has reported all GRI indicators (including sector supplements) or explains why certain indicators are not deemed relevant. Also, the Disclosures on Management Approach (DMA) are provided, necessary under GRI A.

Shell does not refrain from reporting on ‘sensitive’ topics such as Nigeria, the Arctic and tight/shale oil and gas, which is in line with previous reports and Shell’s view on reporting. However, one could question the impartiality and balance of the picture provided. An example is the open letter provided by Mutiu Sunmonu, Chairman of Shell Companies in Nigeria, analyzing the current situation in Nigeria. Another example would be the information provided on tight/shale oil and gas, which positions this type of energy as a viable alternative to coal (bypassing the discussion on renewable energy). Additionally, the concerns surrounding fracking (including the use of chemicals and the environmental footprint) are touched upon, but not discussed in great detail.

 

Concerning the form of the report, I conclude that the report is not integrated (yet) with the financial report. Among companies the opinions differ as to what extent sustainability reports should be integrated in the financial report. Some argue that financial reports and sustainability reports have different readers, therefore underscoring the argument that these reports should be published separately. Others argue that when the topic becomes increasingly important and strategic, it should be integrated into the financial report and consequently into internal reporting, daily management and the overall strategy. This would also follow the considerations of the new GRI guidelines, the concept of Integrated Reporting (www.theiirc.org) and the criteria of the Dutch Transparency Benchmark. In the current report, no ambitions are disclosed on the future of the report, and it remains unclear to what extent stakeholders can expect an integrated report in the near future.

 

Finally, I would explore whether it is possible to remove or replace the disclaimer or ‘cautionary note’ on the first page of the report, as it does not necessarily increase the readability of the report and makes readers suspicious about the intent of the disclaimer.

Credibility:

Shell was one of the first companies in the world to obtain external assurance from an independent third party. Shell was also one of the first companies to replace the external assurance by a dedicated External Review Committee (ERC). Currently, Lloyd’s Register provides external assurance on the direct and indirect CO₂ emission data. The GRI table is checked for accuracy by GRI (the work performed merely focuses on checking the references to sections of the report; the quality and content of the report are not checked). When looking closer, however, one will remark that not all references cover the entire GRI indicator. This applies, for instance, to EN9 (which only covers Shell’s oil sands operations in Canada) and OG9 (where GRI requests quantitative information, but solely qualitative information is provided).

I have a couple of remarks regarding the assurance strategy Shell is currently adopting. Firstly, I regard any type of assurance and/or external recognition as a big plus for the quality and credibility of a report. I also understand that in some instances the cons may outweigh the pros and refraining from external assurance becomes a viable option. In addition, one could argue that for both Shell and its stakeholders, much more value is provided by an ERC. However, of a company with the impact on people and the planet as significant as Shell’s, stakeholders should expect externally verified information. Moreover, externally verified information is essential for internal steering purposes (including remuneration) and serves as information to facilitate the ERC in forming its opinion. With regard to the concept of an external review committee, not everyone in the field agrees that this is the preferred option. Mostly because some criticasters argue that an external review committee can be steered towards a preferred outcome for the company, thereby undermining the concerns stakeholders may have as well as the credibility of the report. Discussions regarding this topic are sometimes fuelled by the fact that the company gets to choose its own committee, and incentives such as payments for the members are provided. I must say I cannot disagree with these criticasters. However, I found the feedback provided by the ERC most helpful and well-informed. Also, it is clearly explained that the ERC does not replace external assurance. The most ideal combination, I would suggest, is to have both an external review committee forming its opinion on the basis of its own research and externally verified information. An approach for the assurance could be to adopt the AA1000 framework, which is much more stakeholder oriented.

I would regard the external assurance Lloyd’s Register provides a step in the right direction. Especially if Shell has the ambition to increase the level of assurance (to reasonable assurance and/or high assurance). As a reader, I would be interested in reading more information on the applied guidelines, the work performed, and the findings, recommendations and conclusions. After some clicking on the website one can find the provided assurance statement, which answers most of the questions (and even includes a recommendation from Lloyd’s). It surprises me that the statement from Lloyd’s is not included in the report.

Recommendations:

Shell used to be best-in-class in reporting, but currently other leading companies are outperforming Shell in this respect. It’s a pity, but I’m guessing that Shell has the resources available to implement improvements in its report. I would like to suggest to focus on the following recommendations:

1.       Provide more insight into the sustainable development strategy in relation to mega trends such as energy demand and climate change. Additionally, this strategy should be linked to selected focus areas, targets, KPIs and the assessment of materiality;

2.       Enrich the current assurance and the role of the ERC by obtaining external assurance for the entire report;

3.       Become best-practice in reporting again. This can be achieved by: exploring the concept of integrated reporting, improving the transparency surrounding the materiality assessment, providing SMART targets, providing more insight into governance, controls, roles, responsibilities, lessons learned, etc..

 

Nick de Ruiter is a partner at Sustainalize (www.sustainalize.nl), a global CSR consulting firm that specializes in CSR, CSR reporting, CSR strategy, performance monitoring and external AA1000 assurance.