Professor's Opinion - Shell ruling testifies to shareholder primacy

For decades, Shell has been in an excellent position to transition towards carbon-extensive energy forms. The company uses scenario planning to get insight into long-term (societal) developments, draws on extensive in-house technological and organisational expertise, is firmly embedded in a fine-grained global network covering all stages of the energy value chain, and has very deep pockets. As such, Shell has long been aware of the need to curb greenhouse gas emissions and could have assumed a leading role in the transition towards renewable energy. And yet, only a few months ago Shell envisaged to resume drilling for oil and gas in the Arctic. Today, the bulk of Shell’s new investments are still in fossil fuels. Only one reason can account for the continued dominance of fossil fuels in Shell’s strategic portfolio: maximizing short-term shareholder value. 

The talked-up business case, where firms voluntary take environmental protection measures to boost their profitability, does surely not hold for a ‘tragedy of the commons’ like climate change. As long as revenues from carbon-intensive activities accrue to energy firms (like Shell) whereas costs are borne by others (such as citizens around the Equator), firms will not voluntarily discontinue these activities – at least as long as their financial interests continue priming. Therefore, mandatory activities (like court rulings and stringent regulations) are imperative to effectively address environmental and social issues with important externalities, like climate change. The Shell ruling will hopefully be a precedent that incentivizes many firms to become really serious about sustainable business.