At Riviera’s Tanker Shipping & Trade, Europe virtual conference session on ESG & finance, Karatzas Marine Advisors & Co chief executive Basil Karatzas forecasted a future where banks prefer lending to the bigger names in the sector to limit their risk
Investment bank Jeffries senior vice president equity research Randy Giveans emphasised the likelihood that banks will be cautious and lend to bigger names and added that cost will continue to be the “driving force” in a strong market.
However, he noted that there is a clear interest in environmental, social and governance (ESG)-rated companies, even from Western European banks whose funding to shipping has shrunk over the last few years.
ESG compliance is largely evaluated through transparency, and Mr Giveans speculated about the emergence of a trend where lenders favour investment to top tier firms with clear ESG strategies and better corporate governance structures.
“If you have a clear ESG strategy and outlook and tick the ESG boxes, you’ll command more investment dollars” said Mr Giveans.
He also cited high-profile green financing deals, including the October 2020 Euronav deal where the company secured US$713M from lenders at reduced interest rates to order four VLCCs, conditional on emissions goals being met.
Mr Giveans warned that complexities such as the coronavirus pandemic have made it difficult to quantify a return purely based on ESG, and that factors such as fleet age and diversification, charter rates and others come into play.
Panellists also discussed the requirements for shipowners to show evidence of emissions abatement efforts to secure funding and the concomitant increase in requirements for data as proof. The banks that are signatories to the Poseidon Principles require that clients provide the same emissions data they currently send to IMO, for example.
Vortexa freight analyst Arthur Richter said that ESG financing will fundamentally place new emphasis on data reporting. If access to capital is to be linked to transparency in reporting, loans will require data, he said.
Demonstrating compliance with emissions goals will require companies to track emissions via satellite, use AI emissions reporting and/or green freight premium models.
Charterers will use more data to anticipate price changes and the availability of tonnage to optimise operations and help save costs.
“If you are using data to make your operations more efficient, you are saving money which can then be reinvested in sustainable solutions. You are meeting your ESG goals by using the data and improving the bottom line” said Mr Richter.
Going forward, bridging the funding gap on decarbonisation is one of the industry’s biggest challenges, conference panellists said. Industry studies such as Shell’s decarbonising shipping report suggest that the cost of decarbonisation could be well over US$1Tn by 2050.
Macquarie Asset Management senior shipping industry advisor Morten Arntzen Macquaries said Macquarie believes that IMO’s decarbonisation goals can only be achieved if cargo interests make a commitment to shipowner profitability over the coming decades.
Mr Arntzen said if tanker operators look to secure five-year charters for dual-fuel systems and even longer charters for zero-emissions vessels (ZEVs), they “will easily find credit money and traditional funding from banks. Even private equity firms will open their coffers to these deals.”
He said lenders have soured on shipping over the last decade in which “no sector in shipping has returned its costs in capital," and added that successful decarbonisation within the maritime industry is not a question but a necessity and that the maritime industry will have to fundamentally change the way it operates.
“The industry has no option but to plan for this” he said.
Mr Arntzen said he believes the LNG segment, which was built on the back of long-term charters as opposed to the cargo-based focus on the spot market, should serve as the model going forward.
Mr Karatzas echoed the sentiment and said in future, crude tankers will have a harder time securing funding compared to LNG vessels. Raising future capital in shipping, concluded Mr Arntzen, will require companies to achieve fixed employment for vessels or risk missing emissions goals.