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UCL: ships with better energy efficiency are not getting cheaper finance deals
A study by UCL Energy Institute suggests banks’ lending practices could exacerbate the risk of stranded assets in shipping
Conclusions from a University College London (UCL) Energy Institute research paper show that a vessel’s carbon intensity does not directly impact the cost of the loan for that ship. Even after the Paris Agreement, while some banks reward companies with better climate scores, they do not distinguish loan terms based on an individual vessel’s carbon intensity.
The study noted, “Although lenders pay attention to climate scores at a corporate level, they are not yet directly supporting lower-emissions ships through a pricing mechanism. This is explained by the lack of formally including asset-level climate performance in the credit risk assessments conducted by major shipping lenders, which are, instead, based on backward-looking metrics of shipowners and the past performance of a shipping segment.”
Most shipping debt, in the study’s sample, uses the borrower as recourse, so the importance of the borrower in the risk analysis prevails over the importance of the asset.
Pricing is also affected by competition between banks for clients.
Loans represent a significant share of ship financing, and a large share of ships are financed through long-term loans (averaging seven years). The risk of premature write-downs and stranded assets remains a serious possibility if stringent climate mitigation regulations are implemented nationally and internationally.
The study’s lead author, PhD student at UCL Energy Institute, Marie Fricaudet said, “The study shows the ambiguity of the shipping lenders when it comes to climate risks.”
“On the one hand, many acknowledge the need for shipping to decarbonise and our data shows loan pricing now reflects the climate performance of the borrower. On the other hand, they are not directly supporting more carbon-efficient ships with cheaper loans.”
This also limits voluntary disclosure initiatives such as the Poseidon Principles as a framework for ship financiers to measure and disclose their shipping portfolio carbon intensity.
While companies with higher CDP scores secured cheaper loans when their lenders were Poseidon Principles signatories, these principles have not yet reduced the cost of debt for low-carbon assets.
Dr Sophie Parker, co-author of the paper, said, “The pricing behaviour we are seeing from the data largely reinforces our expectations that shipping banks are making decisions on a corporate basis rather than looking at individual assets. Even for the most climate-aware banks in the Poseidon Principles, the data indicates that no carrots are being provided in terms of lower loan margins on less carbon-intensive ships.”
She added, “This dynamic should change in the future as climate risk is baked into financial regulation that impacts credit risk practices and voluntary banking alliances put pressure on banks to deliver on their commitments.”
A significant portion of the global fleet is yet to align with IMO’s 2050 decarbonisation target. Despite initiatives like the Sea Cargo Charter, about 30% of the global fleet is dedicated to transporting fossil fuels, with fossil-fuelled ships still dominating newbuildings and new investments.
Noting that “Established reputations often overshadow concrete climate performance”, principal research fellow at UCL Energy Institute, Dr Nadia Ameli, said voluntary commitments alone are insufficient, and called for more rigorous regulations to mandate emissions assessments imposing tangible consequences for high-carbon portfolios if financial institutions are to prioritise climate-friendly investments.
Riviera’s Maritime Decarbonisation Conference, Europe 2024 will be held in Amsterdam, 24-25 September 2024. Click here for more information on this industry-leading event.
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