Environmental performance is an increasing focus in all financing discussions, so shipowners need a clear decarbonisation strategy to secure funding, says Sean McLaughlin, strategy consultant at Houlder.
Understanding financial incentives and disincentives is key to navigating shipping’s decarbonisation transition, yet many shipowners, as well as clean technology and clean fuel providers, can find themselves out of step with the financial institutions that they rely on for the funding of their vessels and green projects.
Funding is increasingly being linked to ‘green’ financing structures, and one of the most important challenges for financiers is to understand and assess downside risk. Shipowners cannot afford to be at the wrong end of that risk assessment. Capital markets are looking for change to take place at a faster rate than the International Maritime Organization (IMO) is dictating, so shipowners require their own clear decarbonisation strategy to secure funding for the required newbuilds and the retrofits needed to ensure the economic life of their existing fleet.
Houlder has spoken to top executives from container, bulk, cruise, tanker and ferry companies as part of its efforts to advance the conversation on how to deliver the decarbonisation transition whilst keeping ships sailing and companies afloat.
An often-cited example of past bad experiences is the introduction of the IMO’s 2020 sulphur cap which, despite its global intent, resulted in the rules being inconsistently applied in some regions of the world. Some owners also point to what they perceive as costly mistakes made during the protracted implementation of the Ballast Water Management Convention. Systems were developed, tested and installed only to then require upgrading to meet changing requirements.
Despite this, most ship owners accept that not decarbonising could become an existential threat to their business and all reflected a view that success is no longer only about following regulation. The funders who rely on the earning capacity of ships see the risk to their loan books of not focusing on the environmental performance of those assets and need to see that the shipowner’s decarbonisation strategy is consistent with market expectations.
The perception of the influence of funders varied significantly amongst shipowners surveyed, the biggest variation being between large and small owners. Large organisations tend to see access to green finance as being relatively straightforward, with the challenge being finding projects which match the funders criteria.
Smaller owners generally don’t issue their own bonds, but alongside the larger operators they are being asked to meet environmental performance criteria to access finance. They increasingly see the cost of their funding being linked to their environmental performance and can even find themselves risking default on their lending covenants if they fail to meet baseline environmental performance.
Many shipowners highlighted that they are being asked by their funders for more data linked to their environmental performance when seeking finance. Being able to provide accurate environmental data isn’t just important in providing ongoing information to funders, its essential in assessing what is deliverable when committing to a program of ongoing improvement at the commencement of a new funding facility.
The need to find a better and more innovative way of collaborating and forming partnerships was the strongest theme amongst the ship owners surveyed. Without this improved cooperation, ship owners see barriers with technology providers, yards, financiers and R&D projects all limiting their decarbonisation trajectory.
The bottom line is that it is key to be bold and to avoid being suffocated by traditional ways of working and collaborating, and this extends to green financing too. Stepping up to the decarbonisation challenge means recognising that in many cases it involves new paradigms, rather than the gradual evolution that shipping has previously been used to.
