BP & Shell Annual Reports Analysis

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CSR and Audit Issue

The first section of this report provides a critical analysis of the corporate social responsibility (CSR) and audit issues based on the annual reports of BP and Shell companies in 2019. Critical elements related to the overall business strategy are summarized in the following table and are further used as a background for recommendations in the consequent section.

Table 1. CSR and audit issues, BP and Shell companies, 2019.

	Corporate Social Responsibility (CSR) Issues	Audit Issues
BP PLC	The use of mitigation hierarchy in a locally designed operating management system (OMS) to address environmental and social impact, as well as robust application of the circular business models. Specifically, in 2019 the company has carefully analyzed its current environmental and social impacts, resulting in a rollout of new operational requirements that are based on closer engagement with local communities. Furthermore, the requirements of ISO 14001 are integrated into OMS since 2017 through the ‘attestation’ process, which encompasses self-verification, management reviews, and feedback from accredited third parties (BP Sustainability Report, 2019, p. 29).	The internal code of conduct adopted in BP prohibits engagement in any form of corruption and bribery. To ensure that this principle is followed, in 2019 the company has successfully delivered anti-bribery and corruption training to 11,000 employees. The company also has pre-developed risk mitigation plan, which suggests avoiding collaboration with counterparties that appear to be poorly trusted providers. Furthermore, the company has its own Upstream business that conducts regional supplier audits to assess anti-bribery and corruption contractual specifications, are normally followed by corrective actions. In 2019, there were has 25 audit reports related to bribery and corruption aspect (BP Sustainability Report, 2019, p. 69)
	The project process starts from the planning stage, where potential has positive and negative impacts are identified. It covers biodiversity, freshwater, air quality, waste analysis, local employment, and community health. The next stage is design and construction, where the adverse impact and risk mitigation measures are designed, followed by the initial assumptions on the impact assessment approach. Further, a series of performance reviews is conducted annually to align local actions for specific ‘issue’ areas, such as noise and odour, flaring, air emissions, and water use. Finally, on the decommissioning stage special actions are taken to implement CSR projects related to materials reuse and disposal, as well as remediation of sites to their initial state before arrival of BP (BP Sustainability Report, p. 55)	On the government side, BP actively participates in the Extractive Industries Transparency Initiative (EITI). The purpose of this initiative is to establish a common framework standardizes the transparency of payments provided to the government. The initiative operates by enforcing the disclosure of government revenues, the role of extractive owners or beneficiaries, as well as special contracts that are related to upstream financial activities. Overall, such effort allows mitigating corruption risks by involving independent auditors that are not biased with corporate limitations and unlikely to be bribed by corrupted government officials.
	Specific activities in CSR area are summarized as follows: Sensitive areas and biodiversity:collaboration with scientists and researchers to achieve no net losses in projects initiated in these areas. Water:only 4% of the total freshwater withdrawal was from the regions that experience water supply stress. Air emissions:The use of lower sulphur fuels for the drilling rig engines and hydraulic stimulation, overall resulting into reduced dioxide emissions. Waste: Mostly focused on recycling; however, due to the nature of business operations the waste disposal strategy remains underdeveloped. Climate change adaptation: Participation in relevant industry forums and initiatives, such as IOGP Practice document related to assessing severe weather change and potential resilience factors. However, no local initiatives are yet suggested.	BP actively contributes towards establishing an oil and gas industry platform that will support initiatives related to the supplier human rights assessments. The core idea is to demonstrate the advantage of respecting human rights and maintain improvements in providing efficient working conditions. In 2019, BP appointed a third-party consultancy agency (NOROG) to maintain the tendering process for experts in supplier human rights due diligence and audits, while the results of this effort are yet to be reported (BP Sustainability Report, 2019, p. 69).
	Hydraulic fracturing: Using contemporary technologies for decommissioning wells so that waste contamination is reduced. For instance, each well is equipped with the multiple steel layers that protect freshwater aquifers and therefore reduces friction and bacterial growth.	BP performed significant efforts in the direction of the revenue transparency and payments to the government. Being an EITI partner, the company focuses on the open disclosure of the governmental data routine parts that supports the objectives of clear and relevant and decision making, as well as supports the formation of the contract transparency base. The national reporting regulations are also implemented by BP to ensure that all upstream activities are disclosed to the local authorities based on its main activities in oil-rich countries, as well as closely related to environmental reporting issues.
	BP pays significant attention to diversity and inclusion when recruiting and retaining its top talents. ‘Respect and inclusion’, as well as ‘valuing difference’ topics were overarching on the 2019’s talent development agenda. As a result, it received many awards from the external organizations in 2019, including being 40 out of 700 most diverse companies by Financial Times rating, scoring 100% in the Human Rights Campaign related to the corporate equality in LBTQ, and acting as a key sponsor for the Trans in the City event (BP Sustainability Report, 2019, p. 62). However, in terms of gender equality, BP still has an opportunity for improvement having mostly males on the positions of group leaders (75% vs. 25%) and executive team (85% vs. 15%) (BP Sustainability Report, 2019, p. 63)	The tax law compliance and lobbying are vaguely explained in the annual report. Primarily, the reference is made to the corporate code of conduct, while specific examples of norms and statutes are not clearly indicated. Furthermore, the principles of advocacy and lobbying are remained limited to the compliance with the US-enacted policy such as US Lobbying Disclosure Act (LDA). (BP Sustainability Report, 2019, p. 71). However, it is not clear whether these commitments fit the regulatory requirements of all countries where the BP operates. Alternatively, it is worth admitting that BP makes profound effort in assessing environmental footprint by establishing its own Carbon Steering Group that directly reports to the senior leadership team. Specifically, the Group suggests the practices for delivering the lower carbon plans in the upstream activities, while also develops and drives the implementation of advanced energy transition related to the downstream activities (BP Sustainability Report, 2019 p. 74).
Royal Dutch Shell PLC	Shell suggests that it is important to support the Paris Agreement’s goal of keeping the rise of global average temperature below two degrees Celsius annually, which results in tackling its own emissions and developing new energy management system. However, Shell pragmatically acknowledges that low-carbon electricity supplies are yet to be practically implemented in a real-life scenario, given that energy consumption behaviors are still liked to the oil and gas usage. Hence, the company invests in a low-carbon consumption projects targeting the year of 2050 as the landmark opportunity to dramatically reduce carbon emissions, which seems rather realistic.in terms of time planning (Shell Sustainability Report, 2019).	Simalrly to BP, Shell starts to adhere to the circular economy approach that suggests the importance of things to be designed for a longer usage and therefore the intension of reuse, recycle, or reproduce existing product. For instance, the main resources of the non-hazardous waste management are related to soil excavations and drill cuttings, which forced the company to treat those on-site or remove for the safe disposal treatment. However, the decommissioning approach is identified as a more complex effort and therefore is not explicitly described in the annual report. Nevertheless, Shell specifies that there is a firm target to recycle 97% of the above-water components of Brent field platform operations located in the North Sea, which is company’s flagship decommissioning project to the date (Shell Sustainability Report, 2019).
	In a human rights protection area, Shell has recently focused on protecting the rights of indigenous people so that their cultures, traditional ways of life, and connection mediums to land and water remain secured. It was realized through the adherence to the public position statement on Free Prior and Informed Consent (FPIC). (Shall Sustainability Report, 2019). The company has also addressed the aspect of cultural heritage through the ‘chance find procedures’, where any construction project might eventually result into the necessity of reviving natural resources. This was practically realized during the process of constructing the Falcon Pipeline, as well the offshore explorations performed in Albania to revive the items of historical significance (Shall Sustainability Report, 2019).	In terms of the tax contribution, Shell follows seven principles of accountability and governance, compliance, business structure, relationships with authorities, seeking and accepting tax incentives, supporting effective tax systems, and maintaining transparency in operations. According to these principles, the company managed to pay more than $61.3 billion to the country governments where it executes its operations, including $7.8 billion of the income taxes and $5.9 billion of the government royalties (Shell Sustainability Report, 2019). Meanwhile, the company was also able to collect $47.6 billion of excise duties, sales taxes and related levies of fuel and compound products on behalf of the government (Shell Sustainability Report, 2019). Overall, these figures require more investigation in terms of audit compliance procedures, since they are presented in a report with more marketing rigor rather than demonstration of legal responsibility for the sources of income is it is done by BP.
	Shell uses The Voluntary Principles on Security and Human Rights (VPSHR) to identify the threats of infraction when safety and security rights of the company employees are touched. The VPSHR principles are integrated into the company regulatory policies and clauses, while are also regularly updated and explored based on the annual risk assessment results and plans towards risk mitigation strategy development (Shall Sustainability Report, 2019).	Shell showcases some uncertainty in disclosing its managing safety policies, primarily specifying the aspect of the Goal Zero ambition of harming people in its core operations. However, the evidence from 2019 shows that that fata incidents were prevalent for contractors operating in Nigeria and USA, while the overall dynamics of such incidents has not significantly changed during the last decade (Shell Sustainability Report, 2019). Therefore, it is recommended to consider potential analysis in terms of secure workplace adaptation and training, further acknowledging that Shell maintains more undisclosed reporting standards comparing to those analyzed for BP.

Recommendations

The following recommendations are further provided for the improvement of non-financial information to meet the expectations and needs of the stakeholders based on the analysis of two annual reports. First, there is a certain gap in explaining how CSR principles help to maintain human rights in both companies since both figures and excerpts are primarily related to the ‘importance’ of pursuing those and ‘recognitions’ received from the printed articles. BP certainly outperforms Shell in describing the aforementioned, while there is still an uncertainty in understanding how protecting human rights coincides with corporate social responsibility, as well as what type of audit should be performed to evaluate these efforts.

For this case, the recommendation is to leverage the opportunity of engaging independent research companies to conduct anonymous surveys of employee opinions on human rights management in terms of CSR standards adopted by both companies, which will provide explanatory specifics based on the pre-designed questionnaire (Wang & Sarkis, 2017). However, it is important to ensure that such a survey opportunity is highly structured and eventually focused on the contractual workforce rather than company management, where the effort of asking for input will be mostly tolerated.

Second, it is notable that both companies are somewhat enthusiastic about their recent efforts in disclosing financial operations related to the government controls in African countries, which will certainly attract the attention of auditing firms and reaffirm the provision of the Sarbanes-Oxley Act of 2002 where necessary. The African approach to doing business, as well as the cultural heritage of the non-transparency evident for financial operations and bribery remains unresolved and requires more effort to become accepted by the audit professionals (Wang & Sarkis, 2017).

Analyzing the efforts of both companies, it is evident that BP takes a more proactive position towards audit transparency, while Shell still needs to provide more specific details on its operations in developing countries. Hence, it is advised to develop new guidelines for the oil and gas companies in terms of reporting their activities in such regions with respect to the anti-bribery and corruption risks.

Overall, the analysis shows that BP and Shell are following both CSR and performance audit requirements, while the former appears to be more successful in reporting those transparently. Nevertheless, further efforts are required to access their adherence to the aforementioned rules through better standardization of the corporate auditing standards. Eventually, it could be achieved through industry benchmarking and research, while currently, this effort is hard to be realized because of the extensive economic depression caused by the pandemics. Nevertheless, the aspect of transparency in demonstrating economic and social commitment should be recognized as a contribution to future human development.

References

BP Sustainability Report (2019). Energy with purpose. Web.

Shell Sustainability Report. (2019). Web.

Wang, Z., & Sarkis, J. (2017). Corporate social responsibility governance, outcomes, and financial performance. Journal of Cleaner Production, 162, 1607-1616. Web.

CSR and Audit Issue

Recommendations

References

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