Researchers developing new tool to measure future risk for vessel investments

Researchers at University College London’s (UCL) Shipping and Oceans Research Group have developed a framework they say offers vessel investors a future-focused view of how a ship may be impacted by different regulatory and market outcomes in shipping’s long-term move toward cleaner fuels and technologies.

The result is a risk score reflecting a particular vessel’s exposure to a range of scenarios that could take shape within the shipping sector over the next decade. 

And the framework evaluates each ship against 384 combinations of assumptions on regulations, fuel price, and technology costs, drawing on a sample of more than 2,000 commercial vessels from the Clarksons World Fleet Register.

While the framework offers a score, the researchers stress that their Climate Resilience Framework is about bringing transparency and risk comparisons to enable informed decision-making in the midst of a high level of uncertainty.

"This isn’t about predicting winners” UCL Shipping and Oceans Research Group Professor of Energy and Transport Tristan Smith said. "It’s about giving the industry access to simple, transparent and repeatable ways to compare risk across asset and design choices and demystifying the crucial evidence-based conversations that are needed across shipping’s value chain."

UCL says its framework builds on existing stranded-asset analysis but assigns quantifiable economic value to a vessel’s ability to adapt, through fuel switching, retrofitting, or deferring investment as opposed to viewing those options as "just a hedge". The approach is based on the real option theory of strategic management.

In its prior work on stranded assets in shipping’s climate transition, UCL has assessed that shipping faces "substantial" financial risks from stranded assets due to stricter GHG regulations in the sector and a global transition to a low-carbon economy, namely that fossil fuel demand will wane on the demand side and that carbon-intensive vessels will become obsolete on the supply side. The group’s past research has also suggested that banks’ lending practices could exacerbate the risk of stranded assets in shipping. 

All investors must actively address these risks through strategic investment choices, energy efficiency measures, and proactive planning, according to UCL.

"Until now, the industry hasn’t had a consistent way to compare transition risk across individual vessels or portfolios. We wanted to build something owners, charterers and financiers could actually use, as a way to identify which assets are exposed, and which characteristics make a ship more resilient," the lead author on the Climate Resilience Framework study, UCL Shipping and Oceans Research Group Senior Research Fellow Dr Marie Fricaudet said.

UCL Oceans Research Group said its framework, which is still undergoing review, has been received positively both during initial general consultation with the shipping industry as well as in a roundtable discussion with shipowners, charterers and financiers held during London’s International Climate Action Week. 

Generally, the group said its framework assumes that retrofitting is assumed to be a viable approach for vessels to improve their risk profiles. 

"A conventional vessel that cannot be converted ranks among the riskiest assets the framework evaluates, underscoring why retrofit readiness is the protective factor," UCL said.

Currently, UCL said older conventional or LNG dual-fuelled, efficient vessels, particularly with wind-assisted propulsion, currently represent a lower climate-risk investment, with the outcome of the International Maritime Organization’s (IMO) Net-Zero Framework climate policy for shipping still uncertain.

And the group said that recent ship ordering practices are showing signs of being broadly consistent with its findings.

"The recent shift toward conventional and LNG dual-fuel vessels, even as zero-carbon fuels attract attention, is consistent with owners responding rationally to the absence of clear policy signals, preserving flexibility while regulatory uncertainty, including the future shape of the IMO’s proposed Net Zero Framework, remains unresolved," UCL said.

UCL said its reviews of the framework’s application at fleet scales have resulted in findings that its researchers intend to test further with industry and finance stakeholders over the coming months. Among the areas for continued research are the relative importance of vessel age, energy efficiency, and retrofit flexibility, as well as the consistently strong performance of technologies such as wind-assisted propulsion, in determining resilience and how those rankings shift under different assumptions about future IMO policy.

Interested stakeholders are requested to contact UCL for a preview of the tool and provide feedback during its next phase of development before eventual release of the tool "in the next few months".

The full paper which describes the framework is available as a preprint at Research Square (DOI: 10.21203/rs.3.rs-9247082/v1).