Sustainability in companies is a broad subject. In order for companies to be sustainable, they have to use several business models such as Triple Bottom Line, Natural Capitalism, The Natural Step, Cradle-to-cradle, the Three Tier model and many other (Eklington, 2004; Hawken et al, 1999; Robert, 2002; McDonough et al, 2009 and Sethi, 1975). Sustainability in business terms has several definitions. According to the Financial Times (2013), business sustainability is managing the triple bottom line which is a process whereby companies manage their financial, social and environmental risks.
Alternatively, it can be defined as a business that can represent resiliency over a period of time and survive shocks because it is related to healthy economy, social and environmental systems. Other definitions relates to sustainability being the ability of people and organisations to preserve the remaining natural resources and use these resources wisely in order to sustain an environmentally healthy future. It also relates to governments creating policies to better the environment. According to the Brundtland (1987), report by the UN Commission on Economic Development, it described sustainability as that which “meets the needs of the present without compromising the ability of the future generations to meet their own goals”.
The aim of this report was to evaluate how Royal Dutch Shell also known as Shell Company interprets and applies the concept of sustainability in both a strategic and operational sense. It also gave recommendations on what Shell could do to move quickly to the direction of becoming a sustainable business.
This report has eight parts. First was the introduction of Shell. Second, it defined sustainability. Third, it gave an overview of sustainability. Fourth it discussed Shell’s strategic approach to sustainability. Fifth, it reviewed three sustainable issues, namely, economic, social and environment. Sixth, it discussed the theory/models used to evaluate Shell’s response to sustainability. Seventh, it recommended what Shell could do to become a sustainable business. Lastly, it drew its conclusion that overall Shell’s strategic approach showed an understanding of sustainability issues that it faced and measures needed to increase sustainable behaviour although there was lack of consistency between its corporate leadership, local leadership and operational behaviour.
The Royal Dutch Shell, also known as Shell is a petroleum multinational company that originated from the Dutch and British region. Shell was started in February 1907 and merged with the Royal Dutch petroleum in order to compete on an international scale with other predominant petroleum companies. Shell is registered in the UK as a public limited company with its main headquarters in Netherlands. It is a worldwide group of oil, gas petrochemical companies. It produces and trades multiple energy resources. Shell deals in providing products such as biofuels, wind, solar power andhydrogen. It also provides technical and consultation services together with expertise in research and development that cater to people within the energy industry. All Shell operations tend to observe business principles such as economic, competition, compliance, local communities, health safety environment and security in order to better its commitment and devotion to sustainable development. Shell’s sustainable development strategy takes a long term and short term approach which ensures that economics, environment and social considerations are implemented within its decision making process (Report2010, 2010).
This report will define sustainability, give an overview of sustainability, discuss Shell’s strategic approach to sustainability, review three sustainable issues, discuss theories and models used to evaluate Shell’s response to sustainability, recommend what Shell could do to become a sustainable business and lastly will draw its conclusion.
Definition of Sustainability
The introduction of the term “sustainable” into the political language came about in a report titled “The limits to growth” in 1972 by the Club of Rome. Club of Rome was an international association which consisted of scientists, business executives, public officials and scholars. “Sustainable” is defined by the writers as a model of output that represents a sustainable world system which does not have a dynamic collapse. It is able to meet the basic material requirements that are needed by the environment (Meadows et al, 1972).
However, the term “sustainability” has several definitions. One, being the ability of people and organisations to preserve the remaining natural resources and use these resources wisely in order to sustain an environmentally healthy future. The otherrelates to governments creating policies to better the environment. According to the Brundtland (1987) report by the UN Commission on Economic Development, sustainability “meets the needs of the present without compromising the ability of the future generations to meet their own goals”.
There are critics of the definition such as Taylor (2002) who argues that the needs of the future generation will be different to the needs of the present generation. He further states that the views of needs in developed countries are not the same as the views of needs of developing countries.
Although criticisms of the definition arise, it still covers the fundamental issues which are the increasing problem of environmental degradation which arises from economic growth and the need for the same growth to lower poverty in society (Attah, 2010). However, according to Financial Times Lexicon (2013), business sustainability is managing the triple bottom line which is a process whereby companies manage their financial, social and environmental risks
Definition of Sustainable Growth
According to the Financial Times Lexicon (2013) sustainablegrowthis the growth which can be sustained without causing economic problems and economic growth that can be sustained without causing environmental problems.The report disputes the idea of growth that contrasts the present with the past, and looks at the future as a continuous possibility for further growth and improvement since the idea failed to recognize that resources are finite, thus growth based on resources cannot be infinite.
For the purpose of this report, it will focus on the business definition of Financial Times Lexicon (2013) of triple bottom line.
An overview of Sustainability
During the Earth Summit (1992) sustainable development was introduced into the global stage in Rio de Janeiro. The summit aimed to work towards balancing between the use and the preservation of nature’s potentials and resources. Its message was that there was a need for governments to redirect national and international policies in order to include the accountability of environmental impact in every economic decision.
Before the introduction of the Brundtland (1987) report and the Earth Summit (1992) report in Rio de Janeiro, activists had debates advocating economic growth or sustainable environment. One of the arguments was that if sustainability reduced the consumption of natural resources drastically, then the rate of economic growth would slow down subsequently. Most of the controlled growth interests came from the developed countries. They stated that natural resources were being reduced rapidly causing environmental damage which would be devastating in the future. Brundtland (1987) report and the Earth Summit (1992) report were created by the UN in order to solve and bring forth a political compromise.
Kyoto Protocol was another attempt to createglobal collaboration towards sustainable development.It is an international agreement associated with the United Nations Framework Convention on Climate Change (UNFCCC, 1997). It was created with the aim of setting a binding target to industrialised countries plus the European Union (EU) in order to reduce greenhouse gas (GHG) emissions. The Kyoto Protocol took off on 16 February 2005 but there was a flaw with the initiative because it only reflected the politics of reaching some sort of agreement instead of the equity of dividing up the gas emission burden (Shaw, 2002).
Not all countries have met the Kyoto Protocol (1997) emission targetssuch as the United States.USA emits about a quarter of the world’s GHGs.Since 3rdDecember 2009, only 189 countries and 1 regional economic integrationorganization (the European Economic Commission) have shown approval or acceptance of the cause. These GHGs that are emitted continue to cause serious floods, wildfires, cyclones and other major climate change. Even though there is a consensus on the need to curb emissions, a general agreement of the distribution of the burden between nations is yet to be reached (UNFCC, 1997).
With all the controversy that comes with the issue of curbing emissions in all countries,a few private organizations and Non Governmental Organizations (NGOs) are willing and already taking strategic steps to ensure sustainable development. There has been an increase of focus in the social and environmental side of business activities within organisations which are increasingly linked to the firms’ economic impact in the idea of sustainability or triple bottom line (Elkington,1997).
Managers have begun to focus more on the triple bottomline which entails People (social), Planet (environmental) and Profit (economic). There has been an increase of organisations trying to be more accountable to their shareholders and are revealing their efforts and strategies of sustainable development in their annual reports (Baskin, 2006; ACCA, 2004).
Description of Shell
Shell is a petroleum multinational company that originated from the Dutch and British region. Shell was started in February 1907 and later merged with the Royal Dutch petroleum in order to compete on an international scale with other predominant petroleum companies. Shell is registered in the UK as a public limited company with its main headquarters in Netherlands. Currently, Shell is the 2nd largest petroleum company in the world with the capability to produce and distribute oil faster than any other company within the industry. In the industry, Exxon Mobil is the leader followed by Shell and others like Agip, Alon, BG Group, Total and Nigerian National Petroleum Corporation (N.N.P.C) just to name a few (Shell, 2012).
Shell can be found in Australia, Canada, Denmark, Netherlands, Norway, UK and USA, among other countries. However, Shell decided to focus on these core countries due to the expertise they offer, quality of infrastructure, and have a continued interest to sustain and invest in them. Shell has continually been investing in gas related businesses such as Liquid natural gas (LNG) and Gas to Liquids (GTL) projects. Shell has recently been involved in unconventional development of hydro carbons. It has broadened its portfolio and delivered differentiated fuels.
The main reason Shell has been successful is due to its ability to produce good quality oil for customers. Its operations are flexible and have lower prices compared to its competitors. Shell has become a leading petroleum company in the developed and developing countries.Shell operates in more than 90 countries andwas ranked 1st by FORTUNE 500 in 2009(Global 500, 2012). It produces 3 Million barrels of oil daily and it has 44,000 Shell Service Stations World wide. It sells145 Billion Litres of fuel and operates 30 Refineries (Shell, 2012).
Shell’s Strategic Approach
SustainAbility is a think tank that has been working with Shell in order to make it sustainable in what it does. This is a major attempt by Shell to apply the ‘triple bottom line’ model to its operations. The chairman of SustainAbility John Elkington, explains why they partnered with Shell (TBL, 2013).
He states that after the Brent Spar and Nigerian controversies, he and his colleagues rejected a number of requests to help Shell. This was because they felt that Shell had executives who were still in denial. Secondly, they were sure they could leverage change better from the outside. And lastly since SustainAblity worked with environmental, human rights and development movements, they could not link up with shell even if they wanted to due to the conflict this would cause with their stakeholders (TBL, 2013).
Although they couldn’t work together, SustainAbility still kept a watchful eye and in 1997 they accepted to meet with the chairman-designate. They realised that Shell should work with the triple bottom line. SustainAbility was impressed by the analysis of Shell’s weakness by CorHerkströter, how thorough Shell’s ‘Society’s Changing Expectations’ stakeholder review was, how committed the Committee of Managing Directors’ were towards a new accountability-map, the development of Exploration & Production’s sustainable development, and the formation of Shell renewable business, with clear market share targets (TBL, 2013).
The term sustainable Oil Company is somewhat a contradiction but SustainAbility was amazed by the brief set up by the new Shell Chemicals executive vice-president. It covered major areas such as health, safety and environment (HSE), mainstream areas like strategy and planning, portfolio management, mergers and acquisitions, and joint ventures. The implications were that, considering sustainability would better the Shell Chemicals portfolio in the future (TBL, 2013).
Shell uses standards and principles approach to promote economic, environmental and social sustainability. It is described as ‘looking at possible economic, business, environmental, and political changes to assess their possible impact on the company and its best potential reaction’ (Fletcher, 2002). It helps the organisation to estimate future issues together with maintaining the company’s reputation through balancing economic, environmental and social issues (Watts, 2002).
Engaging with stakeholders is vital for Shell in order to improve sustainability issues. Creating dialogues with moderate NGOs like Earth Watch would assist Shell in keeping tabs on the changing demands within the society (Shell, 2011). Shell’s social performances is ‘an ongoing process that incorporates all the different ways of operations that contribute positively and negatively, directly and indirectly to the communities and societies where it operates’ (Moser, 2005).
The strategy that is adopted by Shell is to think rationally. The evidence is in their reliance on control systems. Within these systems, well separated management accountabilities and performance metrics can be found (Boele et al., 2001). Since 1997, shell has kept its shareholders informed through its sustainability.
From 1995 Shell’s approach towards sustainability issues changed. According to the former chairman Phillip Watts (2000) the change occurred due to the introduction of Brent Spar and the death of Ogoni leader Ken Saro-Wiwa. Shell started engaging a stakeholder dialogue with different organisations like Amnesty International in 1996. Their business principles were also altered to what it is now in 1997. During 1998 the company released its first statement on social and environmental performance. Their strategy had shifted from internal to external. At that time, the proactive approach towards sustainability issues that they had chosen was one of a kind (Boele et al. 2001).
The best example of Shell’s approach towards sustainability is the case of Nigeria. Shell considers its operations in Nigeria to be its ‘largest and most complex exploration and production venture outside North America’ (Shell International, 1995). Boele et al. (2001) states that Shell has gone ´beyond compliance´ in a number of ways in the Nigeria case, but not all have been effective.
Shell has invested a lot in community relations around the Ogoni region but the Ogoni community is still not convinced. Shell’s business principles are to generate more value for shareholders, society, and the natural environment. There has been success in pushing out inefficiencies inthe business sustainability to generate sustainable shareholder value.
This has led to Shell being accused of not balancing its practises with its principles (MOSOP, 1990). After testing level of integration of Shell’s business strategy with sustainability, Boele et al. (2001) found that the notions of market sensitivity and internal and external accountability were accepted on a corporate level. However the main objective was to apply this approach at a business unit level in Nigeria.
According to Wheeler et al. (2000) a lack of connection between Shell’s Corporate Social Responsibility (CSR) policy and economic and operational reality can be identified. A lot of emphasise has been put on the Nigeria case by NGOs pointing out inconsistencies with Shell’s practices and its communicated values which can ruin the company’s reputation.
Sharp et al. (1999) stated that ‘Brent Spar was a big wake-up call and that Nigeria kept them awake all the time’. One of the largest NGO that follows Shell is Friends of the Earth. When Shell’s sustainability reports were released in 2002 and 2004, a complementary report on Shell’s performance by Friends of the Earth was also released. In the 2004 report it showed that even though Shell was publicly committed to CSR, not much had changed in its practice (TBL, 2013).
Literature focusing three sustainable issues
In this literature review, the report will focus on three sustainable issues. These are economic, social cultural and environment that Shell faces. This will give a clear understanding on how the issues relate to Shell and its response.
Shell is economically stable and its largest producer of oil in the Shell group is Shell Nigeria. The Nigeria Delta extracts nearly 80% of oil therefore most of Shell profits are generated from this Delta. There is a small ethnic group that live around this region named the Ogoni. They live in bad conditions where poverty, malnutrition and disease reign supreme. Clean drinking water and electricity is rare. Shell has not done anything to help these people. Over $30 billion is generated for the Nigerian economy by the oil from this region and yet only 2% of the Ogoni people are employed by Shell. Between 1976 and 1991 Shell encountered oil spills.
Around 40% of its spills were in Ogoni. Due to the amount of spills at that time, water was contaminated, animal and plant life were affected and made life in the region difficult. To emphasise how bad the situation is, the hydrocarbon limit is around 60 times more than the limit set by US. The fumes and gases are causing various diseases to the people of Ogoni but the government together with Shell are not addressing these issues. The government has gone further by providing military security to protect Shell from Ogoni protesters (BSEA, 2013)
Shell has worked hard to better its image and reputation by trying to improve its economic development and community welfare. Depending on what country it operates in, it provides a wide range of community welfare programs. Most of these projects are based on skill development, education, health, community development, environmental issues, safety and enterprise development which have impact on economic growth of each country.
Most of the socio-cultural issues arise when communitiesare excluded in certain projects, lack of benefit or compensation to the community and not realising the community’s decisions mater. A certain level of respect to the human rights and their values should be given by all firms. An example is Shell and the Ogoni people case. Shell did not give Ogoni people the respect they deserved and human right values.
This led to the extinction of fish and loss of crops. Fires were another major problem that resultedinShell’s lack of acknowledging the Ogoni people’s human rights. The fires destroyed the region and took many lives. It left people homeless and others were burnt beyond recognition. In order to explore oil, Shell had to destroy a lot of historic places. This showed lack of respect towards people’s cultures (Nigeria Database, 2013).
However, regardless of the above, Shell aims to maintain safety and reliability of their operations in refining, production plants, to maintain a large market share and finally for collaboration with local companies. A lot of money is still invested to ensure that safety measures are in place in the organisation. An example is the launch of Twelve Life Saving Rules as a way of promoting awareness and eliminating the amount of fatalities and injuries (Shell, 2013).
According to Shell, its main aim is to benefit customers and to adequately respond to the dynamic environment both in a profitable and sustainable way as they plan for the future. Shell still maintains long term growth and efficiency in its performance and aim to be green in future (Shell, 2013).
Shell is involved in a lot of businesses worldwide such as the extraction production of harmful chemicals. As environmental problems become more apparent, Shell has realised that it has to lead by example in the protection of the environment. It formed a Global Solution Process in order to educate staff environmental problems and any other issues that arise (GEC, 2013)
For Shell, GHG and climate change seem to be the biggest environmental issues. It has to aim to produce energy from conventional sources to meet the expected requirements. Shell has had many attempts to change the way it is perceived but still fails. It has tried to solve its bad image by shelling out money in order to generate good press. Some of the bad image has caused Argentina to boycott the company which caused a border conflict between the Asian countries (Pedro et al, 2008)
Shell has given more focus and attention to the carbon dioxide (CO2) emissions which are the main cause of the greenhouse effect. It is still linked to the government when in reducing the growth of the GHG emissions. Shell with other national companies has been litigated due to their impact on climate change.
However, Shell has been working on technology that would allow it to produce the necessary fuel and later capture and store any carbon emitted. Shell has also come up with the most efficient fuel in the oil industry (shell fuel save) which will improve customer loyalty and attract more customers. Customers can save a litre of fuel for every 50 litres. It is working on the energy efficiency to reduce GHGs (Shell, 2013).
Shell tends not to use water for the generation of power unlike its competitors. Ituses water to irrigate crops which will laterbe used as bio fuel. 198 million cubic metres of fresh water was used by Shell in 2009. This was due to Shell using advanced technology and reducing its need for using excess fresh water. Shell is working on a new way of removing water from the tailing in order to better its storage and recycling process. However, this is still work in progress. Most countries that Shelloperates in together with the local authorities have allowed it to use industrial waste water for industrial purposes (Shell, 2013).
Shell’s previous environmental problems
In 1988, an explosion occurred in the Louisiana Shell oil refinery.The explosion caused 6 deaths and 42 injuries. The explosion caused 159 million pounds worth of toxic chemicals to spill into the environment contaminating the air which forced 4,500 people to be evacuated. Shell compensated 172 million dollars in damage to 17,000 claimants (Donovan, 2010).
Another issue occurred in 1998 where Shell violated a number of environmental restrictions at the Mississippi River bank. It had to pay around $1.5 million in civil penalties. A decree was issued to Shell to purchase $500,000 worth of land opposite the Mississippi River. 2013 (Mattera, 2013)
In 2008 there was an oil spill into the Carquinez Strait from the Martinez refinery which is one of Shell’s many refineries. Shell had to pay around $300,000 or more in penalties and fees for compensation. An apology was offered by Shell to whoever was affected by the spillage. However, it has been estimated that 706 million gallons of waste oil finds its way to the ocean yearly. An apology would not mean anything if drastic actions are not taken (Water Encyclopaedia, 2013).
The most recent spill was over the barrier reef which was caused by a 100,000 ton ship which rolled over for several days.The oil which spilt over could cause long-term damage to the reef due to the toxic chemicals in the oil. If the oil did not contain any chemicals then the reef would have a shorter recovery period and it would be back to what it was in 10-20 years. There are suggestions on improvements and laws to stop such from occurring again but spillages still happen. In order for this to stop or reduce dramatically, organisations like Shell need to embrace a sustainable future (Nolan, 2012).
Theory/models used to evaluate Shell’s response to sustainability
Firstly, according to the agency theory, social responsible behaviour should be the responsibility of the government and not organisations. Friedman (1970) states that social responsibility practice is a misuse of corporate resources and also implies that an agency problem is within the firm. The financial resources are meant to increase shareholder value or be reinvested in the organisation.
The theory implies that organisations response to sustainability issues faced in the petroleum industry are minimal and regulations should not be extended. This explains the response of Shell to the 1976 and 1991 oil spill in Nigeria and continues to ignore the Ogoni people’s protests and seems to have support by the Nigerian Government by providing military security.
Secondly, the institutional theory states that the consensus of an organisations sustainable behaviour is determined by institutions (Jones, 1995). The theory emphasises how important institutions are in an organisation’s strategy development (Tsai et al., 2005). With every organisation, a certain level of legitimacy is required in order to survive as well as adapt to the social norms of its business environment.
This perspective illustrates that organisations approaches to sustainability issues will all become similar within the industry. This is due to the similarity in the social expectations the companies will face. This theory emphasises the conformity to institutional context (Frynas, 2009). This is why Shell had to request services of SustainAbility.
Lastly, CSR perspective is Freeman’s (1984) stakeholdertheory. This theory states that an organisation should not be solely responsible to its shareholders but also to its stakeholders. These are the workers, customers, suppliers, and local community. The definition of a stakeholder is ‘any group or individual who can effect or is affected by the achievement of organisation’s objectives’ (Freeman, 1984).
Frynas (2009) also mentions the theory due to the fact that it can explain most responses by organisations within the industry. The external pressures on stakeholders and their importance determine activities of CSR. The organisations resource defines what the importance of a stakeholder is. There is limited choice in behaviour and a dependency to stakeholders in this perspective. Shell seemed to put more emphasis on shareholders than stakeholders.
There are other leading concepts apart from the main theoretical perspectives which can give more information about possible approaches towards solving sustainability issues. According to Sethi (1975), the introduction and development of the three-tier model has been instrumental to the theory. The first of the three tiers is social obligation. It is similar with the licence to operate concept. The next tier is social responsibility which points out and internalises the expectations of the society.
Finally the third tier is social responsiveness which can be defined as stakeholder engagement. Organisations that operate with the third tier level usually produce economic and social value as well as engage with external stakeholders (Wheeler et al., 2001). Most organisations such as Shell that deal with sustainability issues try to use these three tiers mentioned as can be seen in their response to the 1976, 1988, 1991, 1998 and 2008 oil spills but the response is still not balanced.
An alternative three dimensional model that proves instrumental in the assessment of sustainability issues is the triple bottom line which is economic, social, and environmental dimensions to be included in the model as Shell did but without success.
Recommendation on what Shell could do to become a sustainable business
There are a number of theories and perspectives that can be seen within Shell’s approach towards sustainability. The agency and stewardship theory cannot be applied to Shell’s approach because it is doing what governments have regulated. However,it is not always doing the right thing in all situations. The Austrian economic perspective does not consider sustainability issues as opportunities that mould and change institutional structures. The issues are seen as risks and measures set to mitigate them. This makes it also not applicable to Shell. Institutional theory can be applied to Shell but has a limited purpose when assessing Shell’s approach (Naimi, 2011).
There is a clear attempt by Shell to adapt changing social norms. It is working towards having better communication and collaboration with its stakeholders. It has done so by choosing its own strategies. This does not concur with the institutional theory perspective which does not include choice behaviour. Shell’s main aim is to differentiate itself from the other