Financing The 4th Propulsion Revolution Round-Up
As the maritime industry discussed short-term measures at the IMO’s MEPC 76, leaders in finance, law and shipping explored who will fund shipping’s road to decarbonisation and net zero at the latest ICS Leadership Insights Live.
Paul Taylor, Managing Director, Global Head of Shipping and Offshore, Société Générale and Vice Chair, Poseidon Principles, stressed the pivotal role banks have to play in financing vessels that will aid the decarbonisation of the shipping industry: “The starting point of the Poseidon Principles was that, as banks, around $450 billion dollars of senior debt is being paid to the industry, across about 70,000 commercial vessels. That is a privileged position to decide which ships are financed and which ships go on the water.”
The Poseidon Principles, launched 18 June 2019, was developed by global shipping banks, Citi, Société Générale, and DNB, to create a transparent process to measure and publicly report on the carbon footprint of the bank’s portfolios in a bid to support the IMO’s decarbonisation targets for the shipping sector. Upon launching it had 11 signatories and to date it has 27, although Taylor noted there is currently ‘a gap’ of Chinese and Korean banks.
Taylor stressed that the Principles are focused on changing behaviour “not just talking”, but that change will not happen overnight. Its first annual reports revealed that “most financial institutes were slightly misaligned” and he said that the impact of COVID might provide “unpredictable results” due to the different ways vessels have been deployed.
However, his hopes are pinned on the long-term impact of the Poseidon Principles: “The impact will be over years. I can speak for my own bank, but I know other banks are doing the same. We’re bringing climate risk into all credit process and that is hugely important and it’s a one-way momentum.”
The Poseidon Principles have come under fire recently for not going far enough in its ambitions. However, Taylor said he was unphased. “That’s actually good to see, because when, when we launched two years ago, people were saying, this is unrealistic. Now we’re having the opposite, saying that we haven’t gone far enough. And I think that shows how far the industry has come. And what a shift has taken place in in in the industry to date.”
Abhishek Pandey, Managing Director, Global Head Shipping Finance, Standard Chartered, told the audience about the “drastic” changes that have happened in the shipping finance landscape since the financial crisis. “In 2008, the top 20 banks funded around $350 billion in this [shipping] industry. In 2020, the top 20 banks only funded around $250 billion. Out of this EU market share has fallen drastically, exiting completely or reducing exposure to this investment significantly. In 2008, European banks accounted for 100% of the top 10 ship finance lenders, while in 2020 that number is around 50%.”
Pandey noted that this change has meant lenders have had to “moderate” their approach lending into shipping. Furthermore, increased regulation has also changed the finance landscape, with regulations like Basel IV, European Central Bank audits and compliance requirements “that are changing due to geopolitics”.
“This has had a significant impact on the terms that are available today as compared to the work they were available probably 10 or 12 years ago,” he said.
This has led to a diversification of financial sources for shipping and led to an increase in export credit agencies, alternative financing and leasing structures, especially Chinese easing companies that have arisen over the last give year “trying to plug this gap”, said Pandey.
The green agenda
Pandey noted that banks will only continue with “an acceleration of the green agenda.” He stressed that there is a “very evident change happening”, and that banks and other finance “are key to facilitate this transaction” and are actively incorporating green benefits and incentives into their financing structures.
Environmental, Social, Governance (ESG) will continue to play a key role, he said, noting it is one of the themes in the Poseidon Principle, of which Standard Chartered has recently become a signatory.
“They [banks] fully understand that cutting carbon emissions in the shipping sector is crucial in curbing the worst effects of climate change that we are that we are experiencing and ultimately in heading to net zero.”
He added that teamwork and collaboration across all stakeholders in maritime “is essential and everyone has to play their part in the energy transition”.
Shipping’s track record
Asked about the key challenges shipping faces on the road to energy transition, Svein Steimler, President and CEO NYK Group Europe, said that the industry is an “extremely conservative business, that changes late and adopts late”, noting that it took four decades to ratify the ballast water convention.
While he said shipping was not the biggest polluting industry in the world that he is “in part embarrassed to be part of an industry that has done so little for so long” and shipping must do what it can, not simply talk “and wait for something better”.
“That will bring us nowhere, it is unserious and a conservative way of looking, not wanting to do the necessary changes.”
Steimler noted that at his organisation, NYK is taking action, utilising solutions that are available now to aid in the road to decarbonisation. “We have just ordered 12 LNG-fuelled car carriers and have plans to build a total of 20 by 2028. Regarding financing, the Japanese government is highly focused on reducing CO2 and we are doing what we can to renew our fleet on the basis of the technology that is currently there.”
With country’s, individual owners and operators “all working to their own goals and ideas”, Steimler was adamant that “the only way to get aligned is to get a set of rules and regulations that clearly tell us where to go”.
Beatrice Russ, Partner, Maritime, Aviation and Travel, Ince, also stressed that while things like the Poseidon Principles are “very helpful in facilitating decarbonisation” that ultimately regulation is what will create change. “All of us at a personal level and companies and corporations don’t always do the right thing, but if there is a regulation telling us what to do, or if we don’t comply there are consequences, that’s when we change our attitudes and move forward,” she said.
Russ added that it is important that “the regulations remain international, and that is what comes out of the IMO”.
Change is coming
Russ said she has witnessed a massive shift in the shipping industry, “which began just before IMO 2020 and keeps on going.” “There have been massive changes in the cruise industry, looking to greener, energy conscious ships to comply with existing and future regulations. This won’t be the last change. More will be coming.”
Russ added that ESG is “creeping into contractual frameworks” sometimes where you wouldn’t expect it and will likely be a corner stone from now on. Taylor echoed these sentiments, “Very responsible ship owners whether small or large need to take ESG incredibly seriously, not just one part of market, hugely important, it will dictate who will be able to source capital for vessel investments going forward
Speakers concluded that shipping must prepare for more change and even higher ambitions as COP26 looks set to address shipping and its contributions to global emissions.