By Roger Charles, Executive Director, ESRM – SG, Standard Chartered Bank
The push to decarbonise the maritime industry continues apace, with commercial, regulatory and political forces coming together in a meaningful way. Yet there is still much to do – not least, determining who should pay for the investments necessary to limit its environmental impact.
Although it’s not widely known outside the maritime sector, shipping remains one of the most energy-efficient ways to carry goods. Freight transport, for example, uses five times more energy.
But this advantageous position doesn’t mean the industry will have it easy as it seeks to at least halve its CO2 emissions by 2050 – the target set by the UN’s International Maritime Organization (IMO) – while pursuing efforts to phase out such emissions entirely.
That’s because, although shipping currently contributes just under 3 percent (around 1 billion tons) of global CO2 emissions, its near-wholesale reliance on fossil fuels makes it very carbon-intensive. Decarbonising is therefore a major challenge. Deciding where to start begins by noting that 85 percent of emissions come from tankers, container vessels and bulk carriers.
Should the sector fail to act, a study by a policy body of the European Parliament found its share of CO2 emissions could rise nearly sixfold by 2050, as emissions from other sectors decline.1 For its part, the IMO says the industry’s CO2 emissions could by 2050 reach between 90-130 percent of the levels attained in 2008.2
Inaction is not an option: the industry needs to act or risk having tougher targets imposed on it. Success will require a concerted effort from all stakeholders – including from banks like ours.
No silver bullet
Worldwide, steps to drive decarbonisation are well underway. The EU, for example, aims to cut shipping emissions by 40-50 percent by 2050, and is considering emission trading schemes. For its part, Singapore’s Maritime and Port Authority (MPA) has committed SGD100 million to support decarbonisation measures, and the country recently announced it would establish a global centre to help push reductions in emissions.3
Industry players like ship-owners, charterers and others, meanwhile, have made great efforts to assess how they can decarbonise, with much of this now revolving around better fuels and greater operational efficiencies. Yet the answers aren’t straightforward:
- LNG, although cleaner than traditional fuels, comes with supply infrastructure challenges and has a limited greenhouse gas net benefit. Our view is that LNG will be a transition fuel.
- Biofuels have upstream challenges like deforestation and food security.
- Hydrogen and hydrogen-derived fuels (like ammonia), while promising as low- or zero-carbon, aren’t yet available.
And while there are a range of energy efficiency measures that operators can take today (see table), these won’t see the industry reach the IMO’s 2050 targets.
These gaps lie behind industry concerns over whether regulators and governments will intensify existing decarbonisation targets, and whether they will intervene with carbon-based taxes. That could have a significant impact on the economic value of running shipping operations.
On the positive side, though, we see that fleet-owners, charterers and other industry players are motivated by their stakeholders’ expectations – their employees, customers and society – that they decarbonise. In the words of one global shipper, decarbonisation is “a strategic imperative”.
Additionally, we’re greatly encouraged by the increased collaboration among all participants in an industry that is critically important to the global economy, and we are determined to help them succeed.
While initiatives to decarbonise are welcome, much more is needed, particularly when it comes to financing. It’s estimated that halving shipping emissions between 2030-2050 will cost USD1.4-1.9 trillion, with a further USD350 billion needed this decade.
Fully 87 percent of the total sum will be required to fund land-based investments like low-carbon and zero-carbon fuels. Ship-related investments, on the other hand, will require just 13 percent and will fund measures like improving the efficiency of existing ships and new-builds, and making operational improvements like speed management.
In short, the energy transition will not be uniform, and its success will ultimately rely on land-based solutions to meet the industry’s targets to fully decarbonise. This is why the lion’s share of the financing is needed for land-based investments: the necessary upstream infrastructure for low- and zero-carbon fuel, including what’s needed for production, doesn’t yet exist. Sourcing these funds and making the requisite changes is a massive undertaking that will require a joint effort from all stakeholders – the entire value chain from the industry to regulators to financial institutions.
As a leading member of an industry that funds shipping, we recognise our responsibility in helping it to cut emissions. That’s why Standard Chartered recently became a signatory to the Poseidon Principles, a global framework that aims to align carbon emissions in the shipping industry with international targets set by the UN, including its ambition for greenhouse gas emissions to peak as soon as possible and to reduce the total annual GHG emissions by at least 50 percent by 2050 compared to 2008.4
Signatories represent a bank loan portfolio to global shipping of about USD185 billion – nearly half of the global ship finance portfolio. As my colleague Abhishek Pandey, Global Head of Shipping Finance, noted, cutting shipping’s carbon emissions “is crucial in curbing the worst effects of climate change and achieving net-zero”.5
“As a bank that specialises in financing world commerce and the enablers of global trade, signing up to the Poseidon Principles is therefore an important addition to our existing efforts to reduce our financed emissions,” he said.
Being a signatory will help us to determine the types of projects that we might and might not want to finance, and comes as financing options for decarbonising projects for the industry have expanded in recent years, with the wider financial market developing tools specifically to help tackle the decarbonisation challenge.
These tools come in the form of green bonds and loans made available exclusively to finance or re-finance new and/or existing eligible green projects. These instruments have been traditionally used by other industries but are now gaining momentum in shipping as a result of a combination of:
- A high-growth market (attracting the interest of green investors)
- Reputational reasons (seen as being a market leader)
- Availability of cheaper debt (depending on achieving the selected sustainability performance targets). For example, the interest rate might be adjusted based on the ability to meet certain targets while other terms might include margin adjustment, coupon adjustment or repayment amount adjustment.
Broadly, there are three types of funding available:
- Green bonds, which have a strong “use of proceeds” focus, are typically used to fund low- or zero-emissions vessels and/or to retrofit ships that do not transport fossil fuel-derived products.
- Sustainability-linked loans (SLLs) are usually the simplest form of sustainable finance. Their pricing is linked to environmental and social performance metrics such as EEOI or AER, and commonly rely on self-reporting key targets. SLLs are more popular among our clients than green/transition bonds.
- Transition bonds are also garnering interest as a bridge between green bonds and sustainability bonds. Proceeds are used to fund the transition towards a lower environmental impact or to reduce carbon emissions – for example, switching from MDO to LNG propulsion is currently the most popular way for large-scale commercial shipping to cut emissions.
The current focus of these products is decarbonisation, and their use is designed to drive improvements in energy efficiency that dovetail with the Poseidon Principles’ goals.
In the future, it is likely that their scope will broaden to include pricing linked to non- CO2-related ESG metrics which reflect the borrower’s key sustainability initiatives such as air quality, ballast water, human rights at sea and ship-recycling.
Good though these financing options are, though, the fact is that medium-sized operators (which represent more than a third of the global fleet) struggle to access them, as financers often favour their larger peers. And that brings a further challenge, because unless this gap is closed, the global fleet won’t be fully decarbonised.
In closing, there is still much to do and there are many challenges to overcome. That said, the industry recognises that the decarbonisation trends of the moment are irreversible, and players also know that achieving those targets will require a concerted effort. At Standard Chartered, we’re already playing our part.
1 Emission Reduction Targets for International Aviation and Shipping, Directorate General for Internal Policies, European Parliament (2015). https://www.europarl.europa.eu/thinktank/en/document.html?reference=IPOL_STU(2015)569964
2 Fourth Greenhouse Gas Study 2020, IMO (2021). https://www.imo.org/en/OurWork/Environment/Pages/Fourth-IMO-Greenhouse-Gas-Study-2020.aspx
3 Global centre focused on reducing shipping emissions to be set up in Singapore, The Straits Times (April 20, 2021).
5 We’ve joined an industry initiative to reduce carbon emissions in the shipping sector, Standard Chartered (April 20, 2021). https://www.sc.com/en/media/press-release/weve-joined-industry-initiative-to-reduce-carbon-emissions-in-shipping-sector/