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ESG challenges for low carbon shipping

ESG challenges for low carbon shipping

Elias Demian

Article by Elias Demian, Climate and Sustainability Advisor at Moore Greece, in the NAFS magazine.

The transition to a green, low or zero carbon economy is one of the most important challenges of our era. Based on EU data for the 2013-2019 period[1], it is evident that the wider transport sector depicts a considerable increase in its emissions driven also by the growth of the global demand for freight. The biggest increase is noted in air transport (22.1%), followed at great distance by water (10.2%) and land transport (7.2%). Conversely, the emissions of the primary sector and of the manufacturing industry have decreased, albeit the increase in their overall production volume.

Nevertheless, according to the 4th study of the International Maritime Organisation (IMO) for 2020, carbon dioxide (CO2) emissions rose slower compared to the overall increasing trend in GHGs. Maritime shipping, responsible for the transportation of 90% of global trade, emits approximately 2.9% of the global GHG emissions [2].

Figure 1 GHG emissions by NACE sector, EU27, 2013-2019, % change.

Source: Eurostat

The global Green framework.
The Paris agreement highlighted the importance for reducing GHG in all sectors of the global economy, aiming not only in limiting the global temperature increase below 2oC, but also creating the necessary conditions to keep the temperature increase below 1.5oC. The agreement was ratified by 191 UN countries, among which are the biggest contributors to global emissions (China, USA, Russia, India etc)[3].

The European strategy for reducing GHGs from maritime shipping, enacted in 2013, set the framework for recording and monitoring the emissions of large vessels (>5000GT) calling EU ports and highlighted the need for establishing emission reduction targets, globally. Currently in Europe, there are several discussions involving the introduction of maritime shipping in the existing European emissions trading system, which, however, has created several doubts related to the wider impact in the competitiveness of the sector, globally.

In 2018, IMO adopted a strategy for the reduction of the GHG emissions in international shipping, which foresees the reduction of the vessels carbon intensity by 40% in 2030 and by 50% in 2050, compared to 2008. The use of low (or zero) carbon fuels and the application of market-based mechanisms, such as the implementation of a global emissions trading system for international maritime, are some of the indicative medium to long term measures that will support the implementation of the IMO strategy.

Financing Adaptation
It is now clear that the competitiveness of shipping companies will be defined not solely on their ability for safe and reliable transport of goods and raw materials but also from their environmental performance, which has to follow an improving path.

Ship-owners, and in some cases the charterers, will have to claim the cost of the transition to the new low carbon era. This entails significant investments for upgrading the existing fleet and the construction of vessels that will integrate innovative low or zero carbon solutions.

One core question is how will these investments be funded? The international financial sector, which is an intermediary link in the shipping value chain, is currently in a forced effort to support the implementation of high impact investments of low environmental footprint. In June 2019, 24 financial institutions signed the Poseidon Principles, an integrated framework for the evaluation of the shipping finance portfolios, where the participating institutions are examining the impact of the proposed to be funded investments.

In 2020, the International Capital Market Association (ICMA) published the sustainability linked bond principles (SLBP) referring to sustainability linked loans and bonds (SLLs/SLBs). The difference of SLLs/SLBs from the traditional green loans/bons lies on the fact that the supply of financing is linked not only with the environmental and social sustainability of the investment but also with the overall environmental, social and governance corporate performance. Consequently, in the case of maritime shipping, the SLLs/SLBs are not addressed in financing a specific investment, that is one or more vessels of low environmental/climate impact, but on supporting the shipping companies in implementing an integrated plan to improve their ESG (Environmental, Social and Governance standards) standards. Therefore, a prerequisite of accessing this type of funding is to design and implement an integrated environmental and sustainability development plan (i.e. through a social responsibility framework) with specific objectives, an effective monitoring system and an accurate reporting methodology. Inefficiencies in the implementation of the ESG corporate plan, such as the inability to reach the environmental standards foreseen in the plan, will entail the risk of paying higher interest rates to the lenders

The SLLs/SLBs global market exceeded $70 billion [4], while the pandemic and the need for liquidity is expected to significantly increase demand for SLLs/SLBs also in 2021. Maritime shipping is the industry with the 2nd higher demand for SLLs, following the energy sector.

Challenges for the Greek-owned shipping
The more stringent environmental and climate ΙΜΟ[5] targets for global maritime shipping create new conditions in shaping the operation of the international freight transport sector in the years to come.

Funding environmental and climate innovation with the use of those financing products that relate borrowing costs with ESG performance appears to be the only way to achieve low carbon shipping. However, using these products requires a long-term corporate plan that will integrate the new challenges from the tightening of the international environmental/climate regulation a dynamic corporate strategy. Such plans should foresee structures that on the one hand will monitor and record the corporate environmental and social performance and at the same time will be able to provide effective interventions to further improve ESG status. Otherwise, borrowing becomes more expensive and accessing international ports, under the burden of not meeting IMO regulations, is uncertain.

The exposure of the Greek ship-owners in the transition of the international maritime is big. The global leading Greek-owned shipping consists of many small shipping companies, that are facing a complex puzzle related with the how and when to enter this modern way of monitoring and recording their ESG performance or any other organized solution that will allow receiving competitive financing. Indeed, the cost of entry may be disproportionately large compared to bigger firms already using SLLs/SLBs to finance their investment portfolios, while on the other hand, the exact point of entry might be decisive for accessing any modern ESG linked financing products.

The global trend in greening the blue economy should be enough to find the solutions to the above puzzle and to proceed in the generation of those relevant conditions that will allow the Greek-owned shipping to continue holding its dominating global position in the decades to come. Currently, monitoring ESG performance and the establishment of an integrated strategic plan for continuous improvement of the companies’ environmental and climate footprint will set the foundations for accessing those financing tools necessary to modernize and make water transport more environmentally friendly. This is a basic element of the Greek sector’s sustainability and competitiveness, especially in the current era where the adoption of solutions that reduce the sector’s environmental footprint is a one-way street. Towards that aspect, taking small but strategic and low-cost steps towards the establishment of an ESG culture is necessary and possibly not that difficult. After all, the experience shows that most of the shipping companies have already started implementing some measures to improve their ESG performance. What may be missing is an integrated medium-term monitoring plan with realistic goals for continuous improvement.
* Elias Demian is an environmental scientist specialised in Environmental Management and Policy (Lund University, Sweden) and in Applied Economics and Finance (Athens University of Economics and Business, Greece). He is a climate and sustainability advisor in Moore Greece, researcher in microeconomics and environmental economics in the Foundation for Economic and Industrial Research (IOBE) and member of the External Monitoring Team of the LIFE programme for South Europe (Greece, Cyprus, Bulgaria).
[1] The limited operation of the European economy due to the restricting measures imposed because of the COVID-19 pandemic led to the reduction of the GHG emissions in 2020 in most of the EU sectors. The return to the pre-COVID-19 levels is expected after the end of the pandemic..
[2] Fourth IMO GHG study, July 2020.
[3] The USA, that withdrew from the Paris Agreement during the Trump presidency, returned in January 2021.
[5] Recently, the United States, wanting to emphasize even more the recent reversal in climate protection issues, announced its intention to push the IMO to set a target for zero-emission shipping in 2050.