In 2020s, shipping finance set to be conditional on sustainability

UK Chamber of Shipping policy director Peter Aylott reported that trade disruptions caused by the ongoing pandemic have led to an 8% drop in global GHG emissions. However, Mr Aylott said the shipping industry is not likely to see a continuation of pandemic-related emissions reductions over the coming decade.

“We will continue to work harder and further towards zero-emission shipping,” he said.

The industry is facing a period of intense regulatory change, and recent IMO measures have received significant criticism. In November, environmental organisations suggested new draft measures agreed by IMO’s Marine Environment Protection Committee (MEPC) could allow emissions from the global fleet to continue to rise over the next 10 years. MEPC draft measures include an Energy Efficiency Existing Ship Index (EEXI) to address technical aspects of vessel decarbonisation as well as a new operational carbon intensity indicator (CII).

However, Maritime Bergen CEO Siv Remøy-Vangen pointed out that funding sustainable shipping comes at a premium that could drive shipowners out of business, particularly if regulations become decentralised and fragmented.

Were fragmentation to occur, she said “you will see owners basically not being able to survive because of the [costs]. They won’t make money and they [will be unable to make] new investments. If we have one set of regulations in Norway, one in the UK, another in the EU, you will see changes in trade with established industry exporters maybe losing their entire livelihood.”

Ms Remøy-Vangen expressed her hope that IMO regulation would create a standardised system to help level the playing field for fleet owners everywhere.

Representing financiers, Nordea’s chief analyst for sustainable finance Thina Margrethe Saltvedt said 2020 has seen an increase in demand for renewables coincide with a fall in oil demand. Meanwhile, funding for renewable projects has continued to be fairly steady, only slightly affected by the global slowdown. In comparison, investment in oil and coal has fallen by 30% and 15-20%, respectively, over the same period.

Ms Saltvedt predicted that global oil demand will peak between 2025-2030. Natural gas demand is expected to peak around 2035, she said. And while the demand in renewables will continue to grow production costs will also rise, and she cautioned that investment in the renewables sector must keep up with costs in order to meet the Paris Agreement goals. Change in the market is largely being driven by economic and regulatory changes, Ms Saltvedt said.

“Be careful with how far the demand is changing. The money can move fast not only because of the physical risk but also risk connected to transformation due to policy or market requirements,” she cautioned.

Climate regulation brings with it the risk of "stranded assets", utilising technology and fuels that either have been regulated out of use or which market dynamics have rendered uncompetitive – and this risk clearly extends into shipping investment, as Ms Saltvedt alluded to.

With shipping finance set to undergo a change, Mr Aylott said the next decade will see research and development funding from states and international organisations forthcoming to regenerate economic opportunity. He also expects to see new investment from sources that have, to date, avoided shipping.

With ‘green financing’ and the Poseidon Principles now a prominent part of the industry, climate considerations will become ever more important when scrutinising loan applications. Ms Saltvedt said the financial sector hopes to learn from the 2008 market crash by demanding greater transparency from borrowers.

“Now we see the need to include climate risks and sustainability when we measure risk, so capital will support projects and companies in the future that support the transition to a greener and more sustainable world.”

Debt financing has seen the rise in issuance of ‘green’ bonds over the last decade as questions over climate issues have grown. Shipowners are advised to communicate their sustainability plans clearly, Ms Saltvedt said.

“You should be aware that the investors are looking into your home page to try to find information about how you work with sustainability and climate-related issues, and if they can’t find this information, of course, it is easy to draw the conclusion that it is not important for your company.”