Green shipping: a $1.9tn investment opportunity?
Unsurprisingly, the largest source of carbon emissions comes from fuel combustion for propulsion. Fossil fuels (HFO, MGO, VLSFO and LNG1) currently provide 99% of sector’s final energy demand and all have issues from contributing to CO2 emissions, black carbon and methane leakage. International shipping provides 80–90% of global trade and accounts for 70% of global shipping emissions – if it were a country, it would be the 6th largest emitting country2.
To reach a 1.5°C scenario the sector drastically needs to decarbonise. In a business-as-usual scenario, the OECD forecast maritime trade volumes to triple by 2050, bringing with it up to 250% increase in CO2-equivalent emissions.
In this paper, we explore three key areas:
1.THE WAVE OF ENVIRONMENTAL REGULATION
– The shipping industry is facing of a wave of upcoming environmental regulations over the next 24 months and beyond. We look at the upcoming regulations and what they could mean for the industry
–Vessels that do nothing to reduce emissions could face a triple hit of financial penalties, higher carbon taxes and reduced consumer demand
2. PATHWAYS TO DECARBONISATION
–We revisit the decarbonisation strategy of the sector, examining the most likely short, medium and long-term pathways the industry can and will implement, including the pros and cons of each
3.GREEN SHIPPING – A $1.9TN MARKET OPPORTUNITY
–To meet the International Maritime Organization (IMO) 2050 emission targets, the scale of investment is estimated to be up to $1.9tn3
We have analysed over 100 decarbonisation projects being implemented across the industry and its value chain, focussing on engine technology, renewable fuel production, as well as bunkering and infrastructure projects.
THE $1.9TN INVESTMENT OPPORTUNITY
It will require between $1–1.4tn of cumulative investment across the shipping industry and its value chain, to reach the IMO’s target of reducing absolute emissions by at least 50% by 2050 (or $50–70bn annually between 2030–2050). To fully decarbonise the industry, cumulative investment between $1.4–1.9tn will be required between 2030–20509.
These estimates are based on a scenario in which ammonia becomes the primary zero carbon fuel choice. However, even if other fuels such as hydrogen or e-methanol become more dominant, the magnitude of investment needed does not significantly change.
The vast majority of decarbonisation will come from the fuels and therefore, unsurprisingly, that is where the majority of investment is needed. The pie chart below shows the breakdown of the $1.9tn by decarbonisation pathway.
Broadly speaking, the investment opportunity can be split into two different areas:
1.Investments needed to improve the ships themselves (energy efficiency and engines) which account for 13% of the total required investment and
2.The land-based storage and bunkering infrastructure investment needed for ammonia and hydrogen synthesis (87% of required investment).
The bar charts below outline the quantum of investment required in these two areas when adopting various methodologies of ammonia production for the two decarbonisation scenarios.
As an investor, one way of accessing this investment opportunity is to create a basket a companies which are well-placed to facilitate and benefit from the greening of the shipping industry.
To do this, we have used our proprietary tool, ThemEx, which aligns companies to sustainable investment themes including the UN Sustainable Development Goals based on their products and services. This analysis can be overlayed with fundamental analysis to identify those companies exposed to the four ‘green shipping’ sub-themes outlined above.
To be included in a green shipping universe, we would suggest that companies should have one or more of the following:
1.Derive the majority of revenues from sales of technology, equipment or services related to marine decarbonization, within our four green shipping sub-themes
2.or, have made substantial investment commitment, typically a majority of their research and development budget, in marine decarbonization technologies, equipment or services, including lower carbon fuel development, distribution or consumption
3.or, be a stakeholder in a marine decarbonization demonstration project recognized by the Global Maritime Forum.
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