Decarbonisation a defining financing factor
A member of the panel at the Baltic Exchange’s “Freight Financials – Charting the Recovery” webinar, Fewster was responding to the question of whether ship finance is likely to become more expensive for companies that do not accept decarbonisation.
“I think it will and actually I hope it will,” he said. “Those companies that don’t have a strategy to decarbonise need to really be pushed out of the industry and if financing becomes more expensive and that makes them less competitive then that may be one way of achieving it.”
He predicted that the big lenders would slowly move away – “or hopefully more quickly” – from those owners that don’t have a strategy to decarbonise. “It will mean owners have to fund themselves through some of the alternative lenders which are typically more expensive, or they will have to fund themselves through capital, which is more expensive. It will become more expensive and that is quite right. So, it is inevitable – you won’t see it overnight, but I do think it’s coming.”
As to what steps shipowners could take to make themselves more attractive to investors, he noted: “It is about transparency. We need to have a full insight into the business and that needs to cover the financial strategy, operating strategy and of course decarbonisation strategy. If they can come to the bank with all those things in a coherent manner, then that is what we are looking for. But we are also looking at track record, the experience of management, the ability to manage through the cycles and access to different sources of liquidity.”
Those companies that don’t have a strategy to decarbonise need to really be pushed out of the industry and if financing becomes more expensive and that makes them less competitive then that may be one way of achieving it
Institutional capital is getting more and more choosy about where and how it will allocate, said Tony Foster, CEO of Marine Capital. Answering the question of whether environmental, social and governance (ESG) is ‘just another hurdle to overcome’, he said: “I think you have to first answer the question what type of institutional investor you are talking about. There is a big difference between a pension fund, a private equity fund and a hedge fund. They may have a different approach – although you could say the pension fund is the ultimate decisionmaker because they will in the end regulate what the other two can do because they are the ones with the money.”
Foster added: “Real institutional capital is getting more and more choosy about where and how it will allocate, and the issue there is that ESG means different things for different people.”
Some shipping companies, especially the listed ones, work quite hard, mostly with consultants, to develop a publishable ESG policy, he said. However: “We have looked at some of those and felt that if you scratched under the surface, there might not be a huge amount of substance there and I think there is a lot more to be done particularly on governance.”
He warned that investors will be more and more aware about which sectors they want to invest in, so it is clearly going to be harder to develop a strategy for tankers, particularly crude tankers, which will appeal to insist investors. “That doesn’t mean it can’t be done but it does mean anyone wanting to pursue that strategy will have to have a very clearly defined proposition which meets and indeed exceeds what people currently believe to be relevant for a shipping company in order to attract that kind of investment.”
Finally, it is about measurability, he said. “We haven’t yet found a common standard for measurability and that is a problem for all of us, because different standards are applied and different consultants have different ways of looking at it and nobody knows exactly how to answer all the questions.”
We are obviously being helped by the markets in terms of bringing investors and pensions and while we have got their attention, we have to start setting out the story
It is important to recognise that ships are high value assets and that is regardless of new ships entering service, said Mark Jackson, CEO of the Baltic Exchange. “When investors come in, they are not just buying new ships but also second-hand. These are long-lived assets so really I think the industry has to come up with a way of hedging that carbon risk.”
Part of the discussion is around trying to push the regulators into providing a clearer pathway, he said. “The IMO obviously is setting out its stall, but regional governments need to assist this. And they will help those investments by providing some of the carrots.”
The shipping industry is going through a heavy educational stage, said Jackson. “We are obviously being helped by the markets in terms of bringing investors and pensions and while we have got their attention, we have to start setting out the story.”
Stephen Fewster at ING, meanwhile, warned that while this challenge can’t be solved by a group of financial institutions alone, there is a duty to raise the dialogue and to raise the awareness with clients and within the industry. “We are probably the biggest provider of loan capital to the industry and we should be able to use that influence to help push the industry in the right direction,” he said.
ING looks at an owner’s fleet overall rather than individual vessels, he pointed out. “It is not that we won’t finance vessels that are above the IMO pathway – we may well do. But of course we want to finance more vessels that are below the pathway and that the owner has a real plan to decarbonise.
“If we go to see an owner who is really not interested in decarbonisation and has no strategy, then I think it is fair to say they wouldn’t be a client for ING.”
Source: The Baltic Briefing