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Stock Analyst Update

Shell to Appeal a Court Order to Reduce Emissions

The court-ordered targets are well beyond Shell’s current plans of reducing carbon intensity by 20% in 2030 and moving to net zero by 2050.

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Ruling on a claim brought by a collection of environmental groups that Shell (RDS.A) has an obligation to contribute to the prevention of climate change through corporate policy, a Dutch District Court ordered on May 26 that Shell must reduce its CO2 emissions, including Scope 1, 2 and 3 by 45% by 2030 from 2019 levels. Shell asserted the complaint exceeded the lawmaking function of the court. The court disagreed and decided it could determine if Shell had a legal obligation to reduce emissions under Dutch civil code. Shell has already said it will appeal. Market reaction was muted with Shell shares trading slightly lower than peers on May 27. Our fair value estimate and moat rating are unchanged.

The court-ordered targets are well beyond Shell’s current plans of reducing carbon intensity by 20% in 2030 and moving to net zero by 2050. It is uncertain how Shell would actually achieve a 45% absolute reduction in emissions. Its current 2030 target is based on a reduction in carbon intensity, which can be achieved through a mix shift to lower-carbon energy and use of carbon offsets such as carbon capture or natural sinks. Intensity targets, which are a ratio of emissions/energy produced, are largely reliant on a greater portion of renewable energy in the portfolio and do not necessarily imply absolute emission reductions, although they likely would. Absolute emission reductions are more difficult to achieve, especially when Scope 3 emissions are included, given they comprise upward of 90% of total emissions from hydrocarbons. Also, oil companies have little, if any, control over Scope 3 emissions as these occur during combustion, well outside its operations. Outright divestment of oil and gas assets is really the only way to “reduce” these emissions. Divestment, however, merely shifts the associated emissions to another operator and has no net impact on global emissions.

 

 

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