PART 1 of 2
Introduction:
Shipping is a lynchpin in global commerce and about 90% of internationally traded goods are transported by ship.
Shipping represents approx. 2% of global emissions and 10-15% of transport emissions. With other industries rapidly reducing emissions plus large volume growth expected in shipping, the industry share of Global GHG is expected to grow exponentially into the future.
Shipping decarbonization must be tackled now.
The bulk of the emissions for shipping are in international long-haul shipping and primarily for Container, Tankers and Bulk Carriers (see below).
To help put this in perspective the 15 largest ships in the world emit as much as 750 million cars per annum!
The IMO (International Maritime Organization) has set industry targets for a 50% GHG reduction from 2008 baseline by 2050.
This is not ambitious enough and needs to be re-calibrated to increase ambition in the industry and drive more rapid change.
Given the global nature of shipping, it is not included in the Paris Agreement (well only local/domestic is) which has been problematic to drive systematic global change.
Shipping is a unique industry in that it’s traditionally low margin, cyclical and largely privately owned with a mixture of owners, operators and other players, making decarbonization complex to implement in a streamlined way.
Shipping also has the lowest per ton emissions and also per ton costs for movements of goods (see diagram below) hence there are limited substitutes and shipping is not going anywhere.
Ships have an approx. 30-year useful life, so decisions on future fleets need to be made now – hence the sustainability agenda must be implemented with much greater urgency.
Given the above and the industry structure, more determinaion and ambition is needed. Not in 5 or 10 years (now) or it will be too late!
Sustainable Finance Growing Rapidly in Shipping:
Given these issues above and shipping being generally accepted as a hard to abate sector, we have seen a relatively small number of green labelled transactions for shipping.
However, since the Sustainability Linked Loans (SSL) and more recently Sustainability Linked Bond (SLB) Principles have been launched, shipping participation in Sustainable Finance is growing rapidly.
We have seen a variety of transactions with some examples listed below:
A large part of the market believes that shipping is not really green and is more transition in nature, given it’s generally classified as a hard to abate sector.
Given this aspect, more often than not shipping companies have opted for Sustainability Linked structures, so as not to be accused of “greenwashing”.
The bulk of Linked Structures are based on the approach as put forward by the Poseidon Principles (which guide shipping lending for banks and require decarbonization reporting disclosures).
Annual Efficiency Ratio (AER) and Energy Efficiency Operational Indicator (EEOI):
As part of these AER and EEOI measures, both types of emissions per nautical mile are calculated and are the most common metrics used in Shipping SLL and SLBs.
AER has actually been the more common metric used and is the one compared with IMO trajectory requirements. IMO has trajectory curves for most ships which reduce over now until 2050.
Hence companies calculate a portfolio fleet score and compare this to where they are, versus the target trajectory across there portfolio as per IMO regulations and goals.
A trajectory graph below (that was undertaken by Odfjell in 2021) shows how this comparison is done. Companies that set their target below the IMO trajectory are considered to be more ambitious.
Climate Bond Initiative (CBI) Criteria:
The other primary reference in the market for Shipping in Sustainable Finance is the Shipping Sector Criteria from the Climate Bond Initiative.
The fundamental difference with the CBI regime is that whilst it’s based on AER or EEOI as the key metrics across a portfolio/fleet, it compares to decarbonization trajectory that assumes 100% decarbonization by 2050, therefore is much more ambitious.
As we can see below the gradient of decarbonization for the global shipping fleet is much steeper as the ambition is higher.
The CBI approach is much more aggressive than the Poseidon Principles (given these are based on IMO ambitions) as they in fact double the ambition.
The CBI criteria requires as part of the certification process that the issuer/borrower puts forward a Managed Reduction Plan (MRP) which is to cover the decarbonization plan (especially for fuels) for the overall useful life of the vessel – not just the life of the bond/loan.
The debate on fuel types and what is workable comes up in this regard.
In Closing:
Finally, another key issue for Sustainable Finance is the unwillingness of external providers and banks to label lending to ships that are dedicated to the transport of fossil fuels as not be eligible for any instrument.
This debate will continue as there is a strong believe that this would just lead to fossil fuel “lock-in” and stranded assets in the longer term – unless these can be repurposed adequately.
Keep a lookout for Part 2 where we cover potential solutions for decarbonizing shipping – Coming Soon!
