A group of financiers with $100 billion of loans to shipowners are about to get stricter on the kinds of vessels they’ll finance as part of a drive to improve the maritime industry’s environmental performance.
Eleven major financiers including Citigroup Inc. and Societe Generale SA are for the first time adopting a set of principles requiring them to maintain their lending books in a way that matches goals in the Paris climate agreement, as well as related targets adopted by global regulator the United Nations’ International Maritime Organization.
It means banks will favor financing of cleaner vessels while shying away from those carriers that are more polluting. The shift will potentially help to tighten a well-supplied freight market that’s depressed rates, said Michael Parker, global head of shipping & logistics at Citigroup.
“Shipowners will think more carefully about the economic life of the asset,” he said. “Climate is a new consideration they haven’t really had in the past.”
A lack of bank finance today is already keeping new ordering low and the impact of the principles will become evident in the next two-to-three years as shipowners consider new IMO targets and limit orders to cleaner vessels, which might reduce supply of new ships, Parker said. There’s already a pick up in scrapping of older ships after the IMO imposed clean-fuel rules for ships starting in 2020, he said.
The financial institutions’ so-called Poseidon Principles will establish a baseline to assess and disclose whether the lenders’ portfolios are in line with the climate goals. They’ll also serve as a tool to manage investment risks such as those posed by new fuels standards or carbon pricing. Under the plan, a loan book that’s ready for new climate policies would be more valuable than one that isn’t.
Banks and pension funds are increasingly pushing for companies in many industries to cut emissions in an effort to reduce the risk of wild stock-market fluctuations caused by climate change and new policies. The Climate Action 100+ group says its goal is to drive change at companies contributing the most greenhouse gas emissions.
“The Poseidon Principles rewrite the role that the financial sector can play in helping achieve the goals of the Paris Agreement,” said James Mitchell, a manager in the climate finance and industry programs at environmental group the Rocky Mountain Institute, which helped develop the measures.
The principles for shipping, being adopted by banks that also include DNB ASA, are intended to evolve over time as the IMO tightens its policies. Shipping companies including A.P. Moller-Maersk A/S are also behind the initiative.
The rules initially mean lending would dovetail with a goal that greenhouse gas emissions from international shipping will peak as soon as possible and fall by at least 50% of their 2008 levels by 2050.
“We know that the portfolio that’s aligned with the target today may not be aligned in 2023, when the targets will probably be tightened,” said Parker, who is the chair of the principles’ drafting committee.
The shift should encourage shipbuilders to innovate with designs so vessels can, in future, switch to cleaner fuels such as biofuels, hydrogen or ammonia from the heavy fuel they use today, said Tristan Smith, a reader in energy and shipping at University College London who helped develop the principles. Vessels that don’t have the flexibility to switch fuels may limit their useful life.
It’s possible some shipowners will continue ordering dirty ships, betting rules that damage their profitability won’t come anytime soon, Smith said.
If a carrier isn’t able to attract good rates, its owner will “either have to accept a much lower second-hand value or have to scrap it prematurely,” he said. “It’s a chain of events that isn’t yet in the regulation, but it’s highly foreseeable.”