ESG stands for Environmental, Social and Governance and in a business setting it can be translated into the sustainability practices in the company’s business model. Further to this, according to PwC, recent trends in ESG performance are now impacting the decisions of investors in the capital market and the ability of shipping companies to access financing.
It goes without saying that ESG is not something new for the maritime industry. Namely, enhanced regulatory requirements and market trends concerning sustainability and the environment generally, have been impacting shipping companies for many years now, but as new requirements continue to be introduced, i.e. the IMO 2050 target for the reduction of GHG emissions by 50% compared to 2008 levels, things are now becoming more challenging for companies, proving that maybe the time to act (as well as financing) may be now running out.
Interestingly though it seems that more change at how the financial sector looks at ESG performance and risk has happened during the last twelve months rather than the last twelve years in total. This just comes to show how financial instruments have brought a new perspective on ESG performance. During a recent GREEN4SEA Talk on ESG, Bjorn K. Haugland, CEO at Skift has stated that the financial sector “require[s] 100% transparency across all data as well as reporting which will demonstrate that company culture is driving beyond compliance all the time”. In essence, this process results to competitiveness across the supply chain which shipping is part of.
From the commercial perspective, it seems that we are ahead of a heavy investment on new technologies with the biggest investment to be realized in alternative fuels, alternative ship propulsion and new designs for ships. Yet, John N. Cotzias has said that “currently, ESG affects all ship operations. We have put a lot on the table, but I doubt if we are ready to proceed correctly and handle everything’’ while referring to the Poseidon Principles as more than challenging for several companies to comply with as there are many issues that need to be addressed prior.
Of course, sustainability is at the heart of the Poseidon Principles, which provide a framework for responsible ship financing; banks and financial institutions will measure and publish whether their shipping portfolios are in line with climate goals set by the IMO- let alone the enormous influence of the Poseidon Principles; signatories represent about US$140Bn in loans to international shipping – almost 30% of the total ship finance portfolio.
What is more, Recent PwC insights have flagged that today, ESG is one of the most important topics on the Board agenda. ‘’Key stakeholders, such as investors, banks and charterers, will soon expect that ESG reporting will be part of a shipping company’s ongoing reporting and will drive the basis of their relationship with the company.’’
Consequently, it is now high time that shipping is required to provide increased transparency through ESG reporting; by using ESG reports, a bank can demonstrate the sustainability of its shipping portfolio. An ESG report can cover everything from emissions to employee health and labor standards to business ethics. Lenders can therefore use the reports to determine the long-term ESG risks on a company’s future growth. Shipping lines, for instance, can demonstrate the fleet’s performance against IMO’s EEDI requirements, report on their lost time injuries or explain their anti-corruption policy. Developing a successful ESG strategy, driven by key executives and the Board of Directors, that will provide for impactful ESG reporting is the next crucial step for all maritime stakeholders.
