Underwriting decarbonisation: Financing key to steer shipping towards a green future
Learn the different ways in which financing can enable shipping decarbonisation.
As it becomes increasingly clear that greenhouse-gas emissions must be drastically cut over the next 30 years in order to save the planet’s climate as we know it,1 there is a growing realisation that the transition to net zero needs transformational change from all industries. And shipping, which is responsible for nearly 3% of man-made CO2 emissions,2 is no exception.
The maritime transportation sector, which has played a pivotal role in keeping world trade alive for years, is now at an inflection point. It is coping simultaneously with surging demand and strained supply chains,3 as well as soaring energy prices,4 even as it seeks to make decarbonisation a priority. However, given the scale and urgency of the problem, lowering emissions will require an all-out effort from industry players as well as proactive regulators and governments supporting the decarbonisation agenda.
At the same time, the journey to a green future will also not come cheap.5 Crucially, banks can aid the shipping industry’s decarbonisation efforts by financing investments in green technologies while linking lending decisions to a company’s environmental impact, and supporting clients with risk management solutions that enable them to better align their operations with the transition to net zero, says Gaurav Moolwaney, Regional Head of Shipping Finance, Europe and Americas, and AME, Standard Chartered.
What are banks doing and is it enough?
In the age of digitalisation, shipping companies have access to mountains of data that can be used not just to improve day-to-day voyage efficiency and predict repair cycles but also boost safety. They can also leverage data insights to explore and adopt alternative fuels, and efficiently deploy capital towards interim and long-term decarbonisation solutions.6
Similarly, banks are using analytical tools to assess climate considerations and measure sustainability data from various sources, including borrowers, in order to make better lending decisions. This is key because commercial banks are the largest source of financing for the shipping industry.7 That means lenders have the power to catalyse change across the industry, including by closely tracking borrowers’ scope-3 emissions,8 which encompass a wide range of indirect emissions that occur across a company’s value chain.
Furthermore, many banks are working towards ensuring their lending portfolios have net-zero emissions by 20509 as investors begin to measure the performance of financial institutions by the yardstick of scope 3 emissions.10 This is particularly relevant to the shipping industry, whose operations touch a range of upstream and downstream functions,11 and whose long asset lifespans and high dependence on fossil fuels means decarbonising the sector will be a capital-intensive exercise.
For instance, shipping companies will need financing to acquire new vessels powered by alternative fuels. Then there are the cost spreads between fossil fuels and alternatives, such as hydrogen and ammonia, which are high, and green fuels are expected to remain expensive for a long time.
Additionally, any comprehensive shift towards the use of greener fuels will not only be expensive, but also complicated. It requires manufacturers to design new engines; port operators and fuel suppliers to build refuelling infrastructure; and energy companies to invest heavily in producing renewables at capacity.
Will banks play an outsized role in more than just funding the future?
According to Standard Chartered estimates, investments of up to US$1.5 trillion in technology, operations and fuels are needed to halve shipping’s carbon emissions by 2050, with about 87% of that likely to be used towards land-based infrastructure.12 Other predictions suggest the industry may need to foot a much bigger bill – as high as US$2.4 trillion to achieve net-zero emissions by 2050.13
Given the extent of capital required, experts agree that the pace at which the shipping industry moves towards a net-zero future will be dictated by the financial sector. For their part, banks have acknowledged the enormity of the role they play in decarbonising shipping by joining hands with the industry in 2019 to help bring the IMO’s goals to fruition.
This led to the creation of the Poseidon Principles – a framework to assess and integrate climate considerations into banks’ lending decisions in a bid to encourage and support decarbonisation in the shipping industry.14 And signatory banks are expected to gradually align their portfolio towards companies achieving a 50% reduction in emissions by 2050 in line with IMO2050.
Industry leaders concur that the Poseidon Principles have already started to positively influence lending decisions and encourage shipowners to adopt greener practices to secure funding.
These considerations clearly demonstrate that the push to decarbonise shipping must be a collaborative effort that combines commitment and direction from industry leaders with regulatory consistency and clarity, and monetary support from banks and financial institutions.
Gaurav Moolwaney concluded, “We believe it is absolutely critical that our clients are thinking about decarbonisation. Of course, nobody has the perfect solution today, but…if they can present us with a plan we can factor that into our lending decisions, and thus play an active role in helping to produce an ideal outcome.”
This article is based on themes discussed during a panel at the 2022 London Ship Finance Forum by Marine Money.
1 actnow
2 GHG Emissions
3 5 ways the covid-19 pandemic has changed the supply chain
4 why russia’s ukraine invasion spiked energy prices 4 charts
5 standard chartered projects up to 15 trillion to decarbonize shipping signs poseidon principles
6 how big data can help shipping net zero
7 CPLCMaritime_Executive Brief_Ship Financing_Digital-Version.pdf
8 briefing-what-are-scope-3-emissions
9 5-steps-to-credible-financed-emissions-measurements
10 ghgprotocol.org
11 askwaves-what-are-scope-3-emissions
12 standard-chartered-projects-up-to-15-trillion-to-decarbonize-shipping-signs-poseidon-principles
13 global-shipping-crosshairs-environmental-scrutiny-deepens
14 https://www.poseidonprinciples.org
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