Evolution of the maritime sector and its shift towards decarbonization
Paul Taylor, Global Head of Maritimes Industries at Societe Generale, has penned his thoughts in Marine Money Magazine - article published on November 10, 2022
Is decarbonization in shipping on track?
There is progress, but much more needs to be done, recognizing the complexities. Being accountable for 90% of global cargo transportation, shipping is not only vital for the economy it is also the most energy-efficient mode of transporting goods around the world in terms of CO2/ton. However, its contribution to global CO2 emissions will rise from 2.5% to more than 15% by 2050 if it continues to expand its global footprint without accelerated action towards decarbonisation. Reaching a consensus on which alternative fuels will lead the industry to its 2050 net zero ambition, the barriers to entry, and how the industry can reach ambitious interim targets for 2030 before the required technology is available are the main challenges today. Moreover, with investment risk in unproven technology at an unprecedented level, stakeholders across the value chain – ship owners, ports, energy suppliers, ship builders, equipment suppliers and, of course, finance and equity providers – are all asking the same questions: what is our investment strategy along this sustainability journey, and how do we approach the next decade?
The global shipping regulator, the IMO, has a key role to play. First, it must map out its decarbonization trajectory to align with the 1.5-degree scenario set out in the Paris Agreement. It must also clarify its long-awaited introduction of carbon taxes, which, together with the introduction of the Carbon Intensity Indicator (CII) in 2023, can be a catalyst for change in behaviour of shipowners and charterers by incentivizing change and penalizing the worst emitters. The onus, however, sits across the whole shipping industry, and stakeholders across the supply chain are coming together to address critical issues through coalitions such as the Getting 2 Zero Coalition and the Poseidon Principles. This collaboration serves to address topics such as the viability, scalability, and supply of zero carbon fuels, how to secure long term employment of new technology vessels and, of course, the availability of finance to support the strategic investment that is central to many of these discussions.
Reputable shipping companies and other maritime stakeholders are today focused on these issues more than ever before, driven through a combination of proactive movement as well as greater scrutiny from suppliers, consumers, and financiers to transparently demonstrate their contribution to the energy transition. Having an ESG roadmap is becoming increasingly critical and is the reason why banks like Societe Generale have chosen to assess each of their maritime client’s ESG commitments, strategies, and investments to date towards decarbonization in driving our origination efforts.
How can the sector align all maritime stakeholders on one pathway towards Net Zero?
While there is an increasing alignment across maritime industry stakeholders of the need to commit to the 1.5-degree scenario, there is a divide between academics and industry players on the trajectory. Low and zero carbon fuels will not become available at the appropriate pace to meet very strict science-based targets. Alignment with any decarbonization trajectory therefore requires a combination of new vessel designs, vessel retrofits and better fleet optimization (which may simply involve charterers having to accept slower speeds as a short-term bridge).
Fuels such as LNG propulsion should also be considered as a transition fuel and a pathway to Bio-LNG and e-LNG and is rightly a strategic part of many shipowners’ transitional approach to net zero. However, accurate scientific knowledge with contemporary, empirical data is an absolute must to understand the impact of methane slip. It is important that banks support their clients on these investments, but this has to be with the knowledge that the carbon intensity of these vessels are accurately measured, therefore this data is key.
The decarbonisation trajectory for the shipping sector is rightly ambitious, requiring behavioural change, new markets and, crucially, new technologies to develop. Whether it’s through future fuel technologies like ammonia engines, hydrogen containment, fuel cells or batteries, or on-ship carbon capture along with CO2 transportation, huge investment and R&D spending is required. There must, however, be a set of realistic interim targets to 2030 until the required technology is available, while respecting the allocated Carbon Budget.
How has Societe Generale’s business model evolved recognising the shift in the maritime industries?
The whole industry value chain is changing, with multiple stakeholders becoming more and more interlinked, especially in context of the energy transition. With attention firmly on the commercial viability and scalability of zero carbon fuels, the dialogue between upstream and downstream parties has escalated, involving energy companies, ship owners and even port operators. Banks have unprecedented opportunity to work closer than ever with their clients, beyond financing new eco-friendly vessels and retro-fitting existing vessels to reduce tailpipe emissions. Bringing together our clients and other stakeholders, including accessing other institutional investors, is key to increased collaboration across the sector and unlocking value, and banks can be central to this critical pathway.
It is therefore key that banks show their agility to evolve with the market, and this is what we are doing at Societe Generale. Aligning our shipping activity with a wider “shift” initiative across our Global Banking and Advisory division, we are leveraging our shipping expertise and the collective intelligence of all teams across related value chains to widen our approach across all maritime industries. In addition to continuing our core shipping finance business, this enables us to follow new value chains from upstream to downstream, including energy suppliers and traders, shipping companies, port and terminal operators, equipment manufacturers, as well as financial investors. Through strategic dialogue with these multiple stakeholders, we can share our insight to evolving shipping trends and challenges with new emerging leaders, while accompanying our existing clients. Through this holistic approach, we will enjoy more strategic dialogue with our clients, providing them with innovative financing solutions and advisory services across the full value chain.