Just weeks ago, Royal Dutch Shell (Shell) announced promises to reduce absolute emissions under operative control by 50% by 2030. In doing so, Shell is pushing back against activist investor pressure to divide the company into separate fossil fuel and clean-energy focused businesses. The board argues that by maintaining unity, cash flow from the legacy businesses may provide a framework from which an energy transition can be made. Shell has been more active in energy transition than some of its counterparts, launching its “Powering Progress” initiative earlier this year. This details the objectives key to reaching its 2050 net-zero target, namely investing in renewables and clean energy solutions. Planning on relocating its headquarters from the Netherlands to the UK and dropping ‘Royal Dutch’ from its name, Shell is going through a rebrand. Although, these changes were forced by the Dutch courts ordering Shell to progress their emissions reductions, perhaps demonstrating reluctance and indecision on the part of the supermajor.
This December, Shell will make its final decision on the relocation, an emissions regulation focused move. Dutch prime minister Mark Rutte has tried to scrap a controversial dividend tax, cited by the Shell group as a reason they will unify shares and move headquarters to the UK. However, the proposal was shelved after 2017 when a repeal of the dividend tax was first suggested, causing uproar from ‘green’ and leftist parties. Shell has faced persistent problems in the Netherlands. In May, a court in The Hague ordered the company to make larger and faster cuts to its carbon emissions than previously planned, which Shell is currently appealing. A Dutch pension fund also announced it would be divesting from all fossil fuel companies, including Shell. The relocation could make it less likely that future cases, similar to that of Milieudefensie, the environmental organisation that incited Shell to cut emissions, are heard.
Shell has been under another environmental scrutiny recently, with a new South African Wild Coast exploration project being unveiled. The corporation has plans to start its 4–5 month project on the 1st of December. The survey produces loud noises every 10 seconds which according to a researcher from the University of Pretoria would ‘result in prolonged effects on marine life’. An online petition has gained almost 300,000 signatures, demanding the government withdraw its approval for the project. Shell has responded, stating they are a ‘leader in safely conducting seismic surveys’.
The activist hedge fund run by Dan Loeb, Third Point, has also recently aimed at Shell, arguing that they should break up into an oil and chemicals business and a separate future-focused green arm. Third Point reasons that this is more sustainable. The oil and chemicals portion would have higher capital costs, resulting in a lower valuation which would decrease investment in dirty business. Royal Bank of Canada analysts estimate that in separate parts Shell could be worth 250 billion USD, well above its current market capitalisation of 178 billion USD. Enthusiasm for ESG focused funds that solely invest in sustainable projects appears to have peaked, and thus a move to a separate green arm seems sensible for Shell’s investor relations. Despite this, Shell has discounted this idea, stating that there are significant synergies among its various businesses and that keeping them together allows it to help its 30 million daily retail customers and 1 million corporate customers decarbonise. After all, the majority of Shell’s emissions are scope 3 – relating to activities from assets not owned or controlled by Shell, but indirectly impacts in its value chain.
Despite this recent negative spotlight, Shell has been an industry leader in ESG. Shell was the first to promote reduced carbon emissions from customers, having diversified away from fossil fuels more than any other super major, and is closest of them to meet the Paris carbon target. It even has a better ESG score than electric-car leader Tesla or hydrogen wonder stock Plug Power. However, this ESG innovation has not impacted the rest of its business. Shell now has a stubbornly low market valuation and is being shunned by an increasing number of fund managers that have rejected oil investment outright. The future of green oil appears to be far from promising.
It is easy to critique Shell’s move to a green future, but it demonstrates that big oil is beginning to acknowledge sustainability in the light of recent climate-focused sentiment. It is too early to predict how a divided ‘green’ and ‘brown’ Shell would fare. Bearing in mind Shell’s comparatively strong ESG policies, other unsustainable super majors may be impacted by these changes even more. Undoubtedly the next few months and years will be critical to Shell’s future, and perhaps it will not just be losing its name in the move to the UK.
By Louis Christie
Sector Head: Philipp Jiang