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The pressure on shipowners to change and to be more transparent in disclosing their environmental, social, and governance (ESG) reporting is growing. With the banking sector now part of the watchdog system, raising capital could become even more difficult than in the past as banks continue to push the implementation of shipping’s green agenda. Too many regulations, especially those targeting environmental issues and climate change, have made shipping finance rather complex and unattractive when taking into account all the risks involved. "If you look at the market today, the banks are less and less inclined to give shipping loans, and those that do stick to the Poseidon Principles. The rest of the market, they don't know what to do," says Dagfinn Lunde, a Splash columnist and founder of eshipfinance.com. Financial institutions and shipowners have an opportunity to align and derisk portfolios in line with decarbonisation targets and avoid stranded assets In June 2019, 11 founding banks launched a regulatory framework for responsible financing of the shipping industry, named the Poseidon Principles. Today, that number has grown to 27 banks, jointly representing around $185bn in shipping finance. In December last year, 15 signatories of the Poseidon Principles disclosed the climate alignment score of their ship finance portfolios, which showed that three banks are aligned with the International Maritime Organization's decarbonisation targets. The climate initiative has been criticised by some shipping companies as being too unambitious. This autumn, the principles could be revised and possibly adapted to meet the outcome of the 26th UN Climate Change Conference of the Parties (COP26) in Glasgow to be held from October 31 to November 12. "Those shipping companies who fail to recognise their social and environmental responsibilities are not within our target client portfolio," says Stephen Fewster, head of shipping finance at ING, one of the signatories to the Poseidon Principles. If this occurs, and a new, stricter regulatory framework is implemented, the pressure on shipowners and the shipping industry in general will be even greater to improve in order to qualify for financing. Abhishek Pandey, global head of shipping finance at Standard Chartered Bank, says that shipowners will need to incorporate the "green cost-benefit analysis" factor alongside other key factors like profitability, safety and sustainability. "They need to align themselves to this transition; otherwise they will struggle sourcing liquidity," he maintains. Decarbonising the maritime industry requires a collaborative effort across all parts of the industry. Shipowners believe charterers and banks should be doing their part as well in facilitating the transition to more efficient ships through investments as well as more favourable terms for loans supporting decarbonisation efforts. Banks and other financiers are seen as key to facilitating this transition. In the last 12 months, the noise in the industry has zoomed in on the non-carbon fuels of the future, and the banks have been looking to support these projects and raise awareness among shipowners. Banks are also giving an incentive to reduce emissions by incorporating green benefits/incentives into their financing structures, in addition to managing the usual risk and return equation. "Working together, financial institutions and shipowners have an opportunity to align and derisk portfolios in line with decarbonisation targets, avoid stranded assets, and reward those who take action," argues Johannah Christensen, managing director at the Global Maritime Forum. For Lunde, it's more a show off at the moment, because the only thing you can do today to reduce carbon emissions is basically go slower. Shipping is a fragmented industry with thousands of players and getting everybody moving in the same direction is really challenging because there are always different perspectives. "Everybody is trying to get green these days and there are all sorts of funny ideas on how to do that. There's nobody who has told what you need to do to be green and everybody has their own idea," Lunde notes. The challenge is how to get to a point where there is a proven technology that the industry is willing to finance and invest in. Christensen says that shipowners will need to work together with their customers, with energy companies, investors and other stakeholders from across the entire maritime value chain on first-mover pilots and demonstration projects to kickstart the transition to a zero-emission future. Shipping companies who fail to recognise their social and environmental responsibilities are not within our target client portfolio However, Gwenael Delattre, head of shipping and offshore, Asia Pacific at Societe Generale, says banks are not equipped to finance new technologies in the current regulatory mode. "If financial regulators were to help us help our clients try and develop these new technologies by giving us some regulatory capital exemptions when we finance something very innovative it would help," he says. "No shipowner at this stage will be able to say that their vessel will be carbon neutral, because the technology is simply not there," argues Stephanie Leow, executive director, shipping finance, global credit markets, Standard Chartered Bank. James Tong, Citi Bank's head of global shipping & logistics APAC and Japan and head of diversified industrials China, agrees, stating that the lack of investment is due to the lack of truly green shipping technology. Tong also trusts that the current market situation should spur collective thinking about how to make the sector more efficient, not just for ships. "The ships are important tools but then we get backlog in terminals. Maybe this is something that we need to look beyond just only shipping. Technology should help, so I hope that those investors coming into market, not only look in investing into a hot asset but also in the efficiency, the green and the software,” he says. Many are still taking the wait and see approach when it comes to defining the concrete initiatives and action plans for their operations and fleets as there is a great deal of uncertainty in the market. Amended green rules will make capital less easy to obtain for inefficient vessels, which might mean that operators unwilling to rise to the occasion could be squeezed out of the business and/or that smaller players will be forced to integrate their businesses. Consequently, a major impact could be felt by small and medium-sized owners and financial institutions looking to back their secondhand ship acquisitions. One of the ways for shipowners to have transparency in order to comply with the loan standards that the banks under the Poseidon Principles have set is the Sea Cargo Charter. The Sea Cargo Charter establishes a framework for assessing and disclosing the climate alignment of ship chartering activities. It sets a benchmark for what it means to be a responsible charterer in the maritime sector and provides actionable guidance on how to achieve this. The Sea Cargo Charter is applicable to bulk charterers with interest in the cargo onboard; those who simply charter out the vessels they charter in; as well as the owners and all charterers in a charterparty chain. "With the Poseidon Principles, what we are also seeing more and more is that banks who basically provide loans to charterers at the end of the day are also asking questions on the environmental footprint and I think if you can show that you're doing this with the Sea Cargo Charter footprint, it gives a lot of comfort to banks that actually they are lending to the right people," says Jan Dieleman, president, Cargill Ocean Transportation and chair of the Sea Cargo Charter Association. Lance Nunez, global marine and terminal logistics director of Dow, says of the Sea Cargo Charter: "The general sentiment from our carriers has been that they understand that emissions reporting is inevitable. What seemed most scary to them was the lack of a standard methodology for data gathering and calculation. If reporting is to be sustainable, it needs to be straightforward and standard across their customer base." There is no perfect world at the moment for shipping. Truth be told, now two years into the Poseidon Principles, not much has changed. The pandemic has not helped move things forward, but the shipping industry in general is still waiting for a concrete regulatory framework with go-to technology. Christensen from the Global Maritime Forum believes that in the immediate future, shipowners need to continue to capture any opportunity to improve technical and operational efficiency. In order to achieve the IMO decarbonisation goals, zero-emission ships will have to enter the waters in the 2030s. Therefore, the idea of providing greater liquidity for green investments for shipowners should be welcome, encouraging owners to improve the environmental performance of their ships, motivating, at the same time, the wider shipbuilding and equipment manufacturers to speed up their innovation. At the moment, visibility is low and the industry is buying time by participating in joint projects to investigate potential new fuels and engines, purchasing carbon credits, looking into ways to use wind, solar and innovative sails, while there is no proven technology that can be scaled for international shipping. "I hope shipowners have learned that we are approaching an infection point of environmental concern. The shipping industry knows that if they do not take control of this, the regulators will," Citi’s Tong warns. One thing is certain: the transition to greener vessels will necessitate a change in ship financing, ushering in a shift to greener, more sustainable, and, most likely, alternative modes of capital access.

Shipowners under pressure as banks push for energy transition

Shipowners unwilling to share information with banks about how they're decarbonising will increasingly be shown the door. Splash Extra discusses shipping and ESG with the world’s top financiers

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