Green principles for the shipping industry
An agreement spearheaded by a coalition of major banks is helping to put the world’s commercial maritime fleets on a more sustainable footing
At the end of 2020, Seaspan, the world’s biggest lessor of container ships, agreed one of the industry’s first sustainability-linked loans, worth an initial $200m. The deal, which creates financial incentives for Seaspan to reduce carbon emissions over the coming years, was signed under the auspices of the Poseidon Principles, a groundbreaking 2019 framework co-designed by Societe Generale and other large banks, which sets the standard in environmentally responsible financing to the global shipping industry.
The basis of the initiative is that signatory banks measure and publicly report the carbon intensity of their shipping loan portfolios, and that the impact on behaviour and lending strategies going forward will have long term implications for the sector as a whole.
“By bringing climate alignment into our credit decisions, banks determine on which vessels their capital will be deployed – and this directly influences which vessels sail on the oceans,” says Paul Taylor, Societe Generale’s Global Head of Shipping & Offshore. “You cannot underestimate the power of a coalition to help bring about a much-needed energy transition in the shipping sector, a coalition built on accountability and transparency.”
With more than 50,000 merchant ships registered in more than 150 countries, the shipping industry transports about 90 per cent of world trade in volume terms1, making it a centrepiece of the global economy. “Without shipping, countries couldn’t trade, half the world would freeze and the other half would starve,” says Tristan Smith, Associate Professor at UCL Energy Institute and a Director at the University Maritime Advisory Services (Umas), a sector-focused commercial advisory service. “It’s a critical enabler of 8bn people living on the planet.”
Yet the industry is also a substantial polluter, accounting for more than 3 per cent of global emissions2. And it is one of the fastest-growing sources of emissions, with estimates suggesting that without prompt action, commercial shipping could account for as much as 15 per cent of global carbon emissions by 2050.
By linking environmentally responsible lending to financing decisions, the Poseidon Principles mark the first significant step towards decarbonisation in a sector for which technological barriers and lack of infrastructure for alternative fuels have made carbon reduction challenging. The agreement also aligns with targets established by the International Maritime Organisation (IMO), the industry regulator, to reduce carbon emissions by 50 per cent in time for 2050 but, according to Paul Taylor, “The Poseidon Principles have the agility to align with more stringent trajectories in the likely event that the IMO intensifies its targets post COP26” .
Smith of UCL says that all of this marks a turning point for the industry. “The Principles will have a huge effect, because they create changes in behaviour,” he says. “They put emissions, and meeting reduction targets, front and centre of every conversation that takes place between banks and anyone in the shipping industry that needs funding.”
The agreement now has 28 signatory banks, accounting for well over $200bn in commercial maritime loans – about 50 per cent of the total – compared with just 11 signatories two years ago, when the agreement came into force. At current rates of growth, bank lending through the Poseidon Principles will soon account for the majority of new commercial shipping loans.
Poseidon signatories issued over $1.2bn in sustainable maritime ship financing in 2020 alone, the first full year of the agreement’s implementation. During the first half of 2021, banks issued almost $1bn in Poseidon-linked debt, including new kinds of financial instruments beyond just loans. Seaspan is already using its $200m six-year loan to improve the carbon efficiency of its fleet as defined by the Poseidon Principles’ Annual Efficiency Ratio (AER), which calculates a vessel’s carbon efficiency through fuel consumption, total distance travelled and design deadweight tonnage.
It is also working to create sustainability-linked charters under which Seaspan clients would be financially rewarded if they outperformed previously agreed AER scores for the vessels they lease. “It’s an approach that flowed directly from the Poseidon Principles’ financing,” says Matt Borys, Treasurer & Head of Capital Markets at Atlas Corporation, Seaspan’s parent company. “The idea is to align the entire industry’s supply chain on carbon.”
John Hatley, GM Market Innovation at Wärtsilä, a company that provides carbon-reduction solutions to the shipping industry, says that the Principles have started to push companies to retrofit their existing fleets: an essential step in shipping’s green journey, given that many of the vessels on the water today – ones that run on fossil fuels – will still be in service in a decade or more. “Companies are coming to us asking about efficiency upgrades, and that shows that banks are influencing the market and creating more desire to adopt decarbonisation strategies,” he says.
At the same time, shipping companies are starting to explore alternative fuels as a way of reducing their carbon footprints. In August, the shipping giant Maersk of Denmark announced that it had ordered eight vessels that are able to run on carbon-neutral methanol in addition to traditional fossil fuel, as part of the company’s drive to reduce carbon emissions3.
A statement from Maersk said that the vessels were between 10 per cent and 15 per cent more expensive than conventional ones, but the company has managed to offset the additional cost via improved financing terms, thanks to the new vessels’ implied carbon reduction.
Ultimately, argues Taylor of Societe Generale, the Poseidon Principles could become a blueprint for other hard-to-decarbonise industries, including steel, insurance and aviation. “Other sectors are looking at doing similar things, and this is because we’ve given accountability and transparency on carbon data in our industry where none existed before. Transparency must be the way forward for all”, he says.