Shipping is transitioning, with new ways of financing and demands for environmental stewardship set to define its future.
The COVID-19 pandemic underscored the importance of shipping for the delivery of critical supplies and, with more than 80 per cent of international goods carried by sea1, it will remain crucial. Even so, the changes brought about by the COVID crisis, coupled with longer-term trends including the shift toward green finance, mean the industry is facing a pivotal moment.
While sources of finance have diversified, the total on offer is less than a decade ago, meaning less to go around2 and stiffer competition for what is available. With many sustainable investment guidelines excluding activities linked to fossil fuels, the risk is that shipping also misses out on flows of green capital.
“As shipping changes, we need financial solutions that promote and reward sustainability,” says Abhishek Pandey, Managing Director and Global Head of Shipping Finance at Standard Chartered. “Balancing profit, environmental concerns and innovation is a collective imperative.”
So complex are the challenges in decarbonising shipping, that the sector was left out of the Paris agreement3 on climate change. The shipping industry emits about 940 million tonnes of carbon annually4 and accounts for about 2.5 per cent of global greenhouse gas emissions, yet so far it has been slow to shift toward environmental, social and governance (ESG) factors.
More than half of the top 24 maritime lending banks, which hold loan portfolios totalling more than USD185 billion, are signed up, and the principles are in line with the International Maritime Organization6’s ambition for greenhouse gas emissions to peak as soon as possible and be reduced by at least 50 per cent by 2050.
But more needs to be done. In particular, a collaborative approach is needed to transition the industry, with governments, investors and banks putting their heads together to find solutions.
First-in-class green deals
Standard Chartered is helping to lead the way, by instigating a number of first-of-their-kind loan agreements7 linked to sustainability targets.
These include a sustainable loan arranged for Odfjell SE that linked the credit margin to progress achieved against the client’s sustainability targets. Odfjell uses a metric for carbon intensity – the Annual Efficiency Ratio – as a sustainability indicator, rather than an absolute emission measure.
A similar green loan deal8 was struck for ASYAD Group’s shipping arm, the Oman Shipping Company, which linked eight years of financing to targets that line up with the UN’s sustainable development goals. The ships produced will have ECO notations – a key standard for environmental ship design9, construction and operation that goes beyond statutory requirements.
While these deals represent a step in the right direction, the industry is facing some challenges around attracting financing.
Traditional bank lending to build vessels and onshore facilities plummeted10 in the past decade, with the financial crisis foreshadowing the exit of many European banks. Growing regulatory pressures increased the pressures, encouraging many financial institutions to sell their portfolios or allow their loans to amortise.
While that vacuum has been filled by alternative investors, particularly leasing companies and private equity, there’s a widening chasm between large shipowners that can attract financing on the best terms, and smaller players who lack the heft to lure investors.
This ongoing squeeze on financing may impact decarbonisation of the industry – something that’s estimated to cost as much as USD5 billion. Smaller operators face a vicious circle, where they struggle to fund ESG requirements, which means they are overlooked by investors, meaning they don’t have the income to become more sustainable.
And that’s where alternative and innovative financing can help, embedding sustainability targets into funding deals to help alleviate the demands placed on companies.
Some imaginative funding tools have already been proposed, including carbon taxes, carbon trading schemes and offsets. Initiatives like the Poseidon Principles and the Sea Cargo Charter are helping define the future of financing, but there’s still work to be done, particularly on closer collaboration.
“Green shipping can only work when all parties are pulling together,” says Mr Pandey. “Standard Chartered is working with its partners and leading the way in innovative international shipping finance that supports decarbonisation.”
This article is based on themes discussed during a panel at Standard Chartered’s recent Global Credit Conference: Opportunities from Disruption. View the recording.