Seemingly from nowhere, a key pressure point has arrived in shipping in the form of ESG. But if approached in the right manner, ESG can also be an opportunity
Environment, Social and Governance (ESG) is rapidly becoming the new focus of shipping company boardrooms. Highlighting its importance, MARITEC senior vice president global client relations Capt Herbert Soanes said: “[ESG ratings] answer the key questions of how exposed your company is and how it is responding to the key risks and opportunities related to ESG in comparison to peers in the industry.” He added that while social responsibility is about crew welfare, it “extends far beyond that to everybody along the value chain”.
On the subject of ship recycling, Capt Soanes said: “Some must be wondering, ‘Do I really have liability when the ship is being recycled – I don’t even own the ship, I am selling it to a cash buyer. Is it my responsibility?’ Yes it is, and you had better believe it.”
He cited an example from last year, when the UK High Court refused to strike down a claim of negligence brought about by the death of a worker during the recycling of a UK-owned ship in Bangladesh. The shipowner in defence claimed no liability, for reasons including it was following standard industry practice, the ship was sold ‘as is’ to a cash buyer and the shipowner had no control over working conditions at the yard.
“There is more money than there are green debt instruments out there”
As a result of the ruling, a major UK law firm concluded there is a very real risk of legal liability, as well as damage to corporate reputation, and that precautions against liability need to be taken.
The China Navigation Company general manager, sustainable development, Simon Bennett also highlighted what companies should and could be doing in respect to ESG if they have ships to be recycled. China Navigation Company has recycled 16 older ships as it has re-tonnaged its fleet in the past five years and Mr Bennett explained that the company uses a class society to pre-audit the yards, as well as audit the recycling. Three of its seafarers are present at the yard the whole period the gates are open. “We do that because we believe we should do that. We don’t have any legal ownership of the ship, it is no longer owned by ourselves, it has been sold to a cash buyer and then sold to the yard, but it is effectively extended-producer-responsibility,” Mr Bennett said.
The Governance Group partner Joachim Nahem noted regulations related to ESG have increased, and in the next two to three years there is likely to be a lot more ESG regulation at both a national and regional level.
Mr Nahem said when The Governance Group advises senior management and boardrooms on ESG, the three most important issues from a short-term perspective are: an ESG scorecard to follow short-term and long-term targets on material topics for the company; tightening or strengthening governance management systems; and improving reporting. On this last issue, Mr Nahem said while there are different ways to achieve this, the TCFD climate risk framework used for financial disclosures is “really key for everyone”.
The EU has been a driving force in this regard. Mr Nahem said that shipowners should pay attention to national regulations, including accounting acts: “We are seeing that financial regulators are demanding more ESG information.”
Homing in on ESG ratings, he said: “There is clearly a very strong movement on ESG ratings, and the coverage is also increasing, so over time, any publicly listed traded company will have an ESG rating.”
He added: “We are seeing a lot more ESG focus from capital markets.” However, when it comes to capital markets, it is not just about risks and downsides; said Mr Nahem: “There is also a lot of upside and opportunity to be had.
“That is one of the key messages when it comes to ESG. If you do this well, there is a lot of opportunity. One of these is issuing debt. We have seen a tremendous rise, from a low base, of issuing green bonds; new debt instruments are coming also, including sustainability-linked bonds. In the shipping industry there have been examples recently of several companies issuing debt based on corporate targets on sustainability. All that have been issued have been oversubscribed. There is more money than there are green debt instruments out there and it is not just for shipping but all industries … that is one to watch in terms of opportunities.”
“There is clearly a very strong movement on ESG ratings, and the coverage is increasing”
One of the first tanker companies to turn ESG to its advantage was Hafnia Limited, which raised its ESG profile and sent a clear signal to investors and clients on its commitment to decarbonisation by linking a loan to its fleet’s emissions performance.
Hafnia Limited had an existing US$676M facility becoming due in March 2022 (consisting of a US$576M loan and a US$100M revolving credit facility) and a US$128M facility due in December 2023. These have been refinanced through a seven-year US$374M sustainability-linked senior secured term loan and revolving credit facility (SLL) with a syndicate of 10 banks. The syndicate consists of ABN AMRO, BNP Paribas, DBS Bank, ING Bank, IYO Bank, Oversea-Chinese Banking Corporation (OCBC Bank), Skandinaviska Enskilda Banken, Société Générale, Standard Chartered Bank, and United Overseas Bank, all of which acted as mandated lead arrangers. Standard Chartered Bank also acted as facility co-ordinator and agent.
The facility has an annual sustainability margin adjustment mechanism that depends on Hafnia’s continuous improvement in emissions-related key performance indicators (KPIs). These KPIs include IMO’s decarbonisation targets and are aligned with the Poseidon Principles. Hafnia has engaged Sustainalytics, a global leader in ESG data and research, to confirm that the SLL’s structure will support Hafnia’s sustainability strategy. ING Bank and OCBC Bank acted as joint sustainability co-ordinators for the SLL.
This is Hafnia’s first syndicated sustainability-linked facility and one of the largest of its kind in the shipping sector. Hafnia chief financial officer Perry van Echtelt said: “We greatly appreciate the strong support from our banks and are proud to collaborate with them on shipping’s decarbonisation. This facility demonstrates Hafnia’s access to highly competitive funding and enduring commitment to decarbonising shipping.”