Banking on climate considerations
Around the world, the environmental agenda is increasing. International focus has been levelled on Greta Thunberg, the 16-year-old credited with starting the school strike for climate movement. Extinction Rebellion, which aims to use civil disobedience and non-violent resistance for environmental protest, has received media coverage across the globe. The Ocean Cleanup has become known for its effort to clean the Great Pacific garbage patch, a Pacific Ocean marine debris particle gyre. As resolve to protect the planet has increased, it has filtered into international shipping and as the sector moves away from fossil fuels to decarbonise, it faces a rapid fleet and technological alteration. This exposes a lot of sectoral players — particularly banks — to risk.
“If banks discover too late [that] they have invested in ships that will become undesirable or even obsolete because of this change, they could see valuation write-downs or even defaults in their portfolio,” notes Dr Tristan Smith, a reader in energy and shipping at the UCL Energy Institute.
The environmental element
Now, shipping stalwarts are getting tougher on their environmental approach. Eleven major shipping banks have stated that they will now take account of climate considerations in lending decisions. The move, the first of its kind, has seen the banks sign up to the Poseidon Principles, which offer “a framework for integrating climate considerations into lending decisions to promote international shipping’s decarbonisation”. Indeed, incentivising the decarbonisation of maritime shipping is behind the institutions’ choice to think about climate when deciding upon lending.
The Poseidon Principles’ founding signatories include Citi, Société Générale, DNB, Nordea, ABN AMRO, Crédit Agricole Corporate and Investment Bank, Danish Ship Finance, Danske Bank, Amsterdam Trade Bank, DVB Bank and ING, with more banks anticipated to sign up in the near future (including Asian banks). Citi, Société Générale and DNB led development of the values, along with Maersk, Lloyd’s Register, Cargill, Euronav and Watson Farley & Williams. Support was provided by the Global Maritime Forum, the UCL Energy Institute and Rocky Mountain Institute, and the principles’ drafting committee featured representatives from signatory banks. Committee chair Michael Parker, who is global industry head of shipping and logistics at Citi, says the banks realise the platform they have within shipping to promote responsible environmental stewardship in the maritime value chain.
“The Poseidon Principles will not only serve our institutions to improve decision-making at a strategic level but will also shape a better future for the shipping industry and our society,” he says.
The values claim they create “a common, global baseline to quantitatively assess and disclose whether financial institutions’ lending portfolios are in line with adopted climate goals” and are therefore key for supporting decision-making of a responsible nature. They are also said to be compatible with IMO goals and policies, including the objectives of lowering annual GHG emissions by at least 50% by 2050 and GHG emissions peaking as soon as possible. Poseidon Principles signatories make a commitment to including them in their internal policies, procedures and standards and agree to collaborate with their partners and clients continually to put the values in place. The principles apply to lenders, relevant lessors and financial guarantors, including export credit agencies.
“The Poseidon Principles are the starting point for pricing in the climate risk of financial institutions’ ship finance portfolios,” says Dr Sophie Parker, University Maritime Advisory Services’ principal consultant. “The disclosure of a bank’s portfolio climate alignment score is the catalyst for banks to start thinking about why particular ships in their portfolio don’t perform as well as others compared to the climate target. It provides the impetus for determining what solutions can be applied to reduce their carbon footprint in the future and to consider the risk of devaluation if they remain exposed to fossil fuel-dependent assets. This will become increasingly important as the shipping industry moves away from fossil fuels to clean fuels.”
Those involved with the values are singing their praises, while Human Rights at Sea and Eco Marine Power have also applauded the standards. James Mitchell, manager of Rocky Mountain Institute’s Global Climate Finance and Industry programmes, lauded “the foresight and commitment” from all those participating in the principles’ development.
“No less than 78% of global GHG emissions can be linked to global capital stock, like power stations, modes of transport and manufacturing facilities,” he states. “By redefining what is possible through cross-sectoral collaboration, the Poseidon Principles rewrite the role that the financial sector can play in helping achieve the goals of the Paris Agreement.”
“The Poseidon Principles are a tool to demonstrate that [banks] are acting responsibly and allow them to compare climate risk with each other, but also a tool that will allow them to manage critical investment risks, retaining their crucial role in providing the liquidity that enables international trade,” adds Dr Smith.
The values’ launch could not have happened at a better time. They demonstrate how sustainable firms can receive reward for good practice. Going forward, the environment will be a key factor when it comes to doing business — and that includes the shipping sector. With growing interest from investors more widely surrounding corporate social responsibility, environmental, social and governance (ESG) — the three main factors when it comes to measuring the ethical effect and sustainability of an investment in a firm — are now critical when it comes to institutional capital.
“ESG … has become incredibly important,” notes Andy Dacy, chief executive of JP Morgan Asset Management’s global transportation group. “You cannot put institutional capital to work without looking at the ESG aspect.”
What’s more, in the next decade or so, there will need to be significant change in the shipping field if the sector wishes to adhere to what the IMO wants. According to Maersk chief operating officer and executive vice president Søren Toft and Lloyd’s Register chief executive Alastair Marsh, emission-free ships must enter the fleet by 2030 — with Mr Marsh saying that this has to happen for the industry to meet the IMO 50% by 2050 goal and Mr Toft saying it must occur “to deliver on ambitious climate targets”.
“This leaves us only ten years to develop the new marine fuels, propulsion technologies and infrastructures that will be required,” he warns.
“The 2020s will be a critical decade for not only piloting and prototyping new fuel types and energy sources but also building future fuel supply chains,” explains Mr Marsh. “The introduction of the Poseidon Principles demonstrates that ship finance is determined to support shipping’s decarbonisation challenge across the maritime value chain and also support other factors such as the energy transition.”
Source: The Baltic Exchange