Banks and investors must have shipping on their radar to be true climate leaders
Banks and investors have been challenged to up their game in the battle to decarbonise the shipping industry, as International Maritime Organisation (IMO) meetings continue this week in London.
In a new report, responsible investment organisation ShareAction calls on banks to align their shipping portfolios with the Paris Agreement and end financing for companies dependent on coal transportation. With shipping emissions set to rise 50-250% by 2050 if left unchecked, ShareAction argues that investor engagement with banks on this issue needs to be a priority.
A number of climate-related risks are identified in the report. As regulation aims at lowering greenhouse gas emissions, the industry is likely to face rising costs, with the IMO 2020 sulphur cap already weighing on companies. Another key risk identified is the industry’s dependency on fossil fuels as a driver of seaborne trade. By 2035, as a result of the energy transition, the transportation of oil and coal by sea could fall 33% and 50% respectively, according to research cited in the report.
ShareAction recommends that banks incorporate climate-related risks into financial analysis to manage these extra headwinds. The industry is already struggling with a surplus of ships and rising debt levels. Energy efficient ships do not just reduce carbon emissions but also have a higher resale value, allowing companies to better repay bank debts in the event of default.
In December 2018, the IMO announced its strategy to reduce GHG emissions, targeting a 50% absolute reduction by 2050. Maersk, the world’s largest container shipping company, then raised the bar, announcing its own target of net-zero emissions by 2050 and aligning with the Paris Agreement. ShareAction is now calling on banks and investors to push others in the industry to match Maersk’s level of ambition or, at a minimum, match the IMO’s target.
ShareAction makes four key recommendations to banks:
· Set and disclose targets for the climate alignment of shipping loan portfolios, aiming for alignment with the Paris Agreement.
· Incorporate climate-related risks into credit risk assessment when lending to shipping companies.
· Require that clients have a strategy and targets to reduce GHG emissions which, at a minimum, meet the IMO 2050 50% reduction target. Banks should engage with clients on alignment with the Paris Agreement, requiring net-zero emissions by 2050.
· Require that clients are not highly dependent on revenues from coal transportation, aligned with or going beyond any existing bank coal policies.
Christian Wilson, senior research officer at ShareAction and author of the report, says: “The shipping industry frequently slips under the radar in the climate change debate and warrants closer scrutiny. To help change the course of the industry from runaway emissions to decarbonisation, banks need to step up and push clients to cut carbon emissions. Institutional investors, who have been instrumental in engaging with banks on fossil fuel financing, now need to use their influence to press banks on this issue, ensuring that their investments have a positive impact on our world.”