Shipping banks step up with emissions reduction initiative
The future’s bright, it’s green! Aware of the environmental consequences of transporting 90% of the world’s cargo by sea, the banks that finance many of those ships are staging a common intervention.
That action is defined in the Poseidon Principles, a new framework to bring climate alignment into credit decisions, prioritising liquidity for greener shipping transactions. Conversely, less bank money may be available in future for refinancing the vessels that fail to comply with emissions requirements laid out by the International Maritime Organisation (IMO).
With the IMO 2020 requirement to reduce sulphur emissions from 3.5% to 0.5% as of 1 January 2020 already touching completion, banks have turned their minds to the longer term. Aware of the severity of the IMO’s 2050 target to reduce 2008 carbon emission levels by at least 50%, banks are taking a bold and responsible step. If left unaddressed, these emissions from ships would mushroom in size by 2050, due to the forecast increase in the world fleet of between 50% and 200% over that timeframe.
With the approximately 70,000 commercial vessels financed by banks making up around 80% of the world’s fleet, banks have a strong collective voice. For years, banks financed a ship via a relatively straightforward analysis of the strength of the client as a corporate and the vessel loan-to-value with or without charter or project. Those days are effectively in the past, we need to show a lot more awareness of what we are really financing and its effect on climate alignment. According to Maritime Strategies International, there is around US$400 billion of senior debt around the market but the global figure is nearer $450 billion including the Chinese lessors. We have a responsibility to know what this money is being invested in.
The Poseidon Principles have been signed by banks representing approximately $100 billion of ship portfolio at the launch. The banks leading the principles are also lobbying the Chinese government, given the shift in the ship financing landscape towards China over the last few years. Having the Chinese lessors on board, as well as the main Asian export credit agencies involved in shipping, would be a great statement and invaluable for the long-term application of the Poseidon Principles in ship financing globally.
The new rule blends ambitions outlined by the IMO with the Equator Principles, a risk management framework, adopted by financial institutions, for determining, assessing and managing environmental and social risk in projects. The IMO’s directive requires shippers to measure the CO₂ and cut emissions.
Spurred on by the Rocky Mountain Institute - an environmental body formerly known as The Carbon War Room – UMAS, the commercial arm of University College of London, and maritime stalwarts, Lloyd’s Register of Shipping, the banking collective will be guided by the Global Maritime Forum (GMF), a trade body.
The GMF created the initiative through the banks, with Citi, Societe Generale and DNB taking the lead, and invited shipping companies to the working group to ensure the proposals were aligned with the wider interests and, therefore, gained the support of shipowners.
The new principles are designed around transparent measurements of carbon intensity, collecting emissions data from the ships in a lending portfolio, weighted by outstanding debt, with bank responsibility reducing as the owed amount amortises. The Principles were developed in recognition of our role as financial institutions in promoting responsible environmental stewardship throughout the maritime value chain. This will mean financing and refinancing vessels that comply with the IMO trajectory towards 2050.
The initial requirement is to measure and report: signatory banks will have to publish a carbon intensity figure in an annual sustainability review and report to the other signatories, to transparently disclose their portfolio in terms of carbon emissions. The inevitable additional workload for these banks will be mitigated by the use of blockchain, for which a technology framework is being innovatively created by one of the partners to the Principles. It will allow the requisite IMO and bank data to be inserted, with the blockchain technique ensuring that private bank data will be hidden from competitors.
But the real aim of the Poseidon Principles is to support our clients to meet the ambitious IMO regulations. This will affect the decisions of signatory banks in the future and ensure that those shipowners who are leading the field in the energy transition will have our support and a greater share of the liquidity available in the bank market.
It is in a company’s interest to operate environmentally-efficient ships, not just so they do the right thing, but for business purposes; these are complementary aims, which should mean that investment in greener vessels will become the norm. Shipowners on board today will prove to be the most competitive in their sector and lead the way as their clients also demand cargos to be transported within a greener logistics chain. With the Principles, banks are encouraging exactly this for all shipowners.
Global Head of Shipping & Offshore at Societe Generale
and Deputy Chair of the Poseidon Principles drafting committee
Read the press release : Societe Generale signs Poseidon Principles promoting shipping industry decarbonisation