A growing interest from investors in companies’ climate and societal accountability has spurred record inflows to funds focused on environmental, social and corporate governance (ESG) issues, with Reuters characterizing 2021 as “the year of ESG investments”. This trend is expected to shift ESG as a priority in the corporate sphere and in maritime industry as well, putting a pressure on corporate boards to boost their ESG skills.
irst seen as a term in 2005, ESG stands for Environmental, Social and Governance factors. ESG is vital for describing the criteria that investors use to evaluate a company and determine if this is worth investing in, analyzing material risks and growth opportunities. This means ESG helps companies’ social and environmental efforts to be quantifiable, thus more easily measured.
In the US alone, 2021 inflows into ESG funds surpassed 2020’s total inflows of $51.1 billion before the end of Q3 in 2021, according to US-based corporate law firm Skadden. Earlier data by Refinitiv Lipper revealed $649 billion poured into ESG-focused funds globally as of 30 November 2021, up from the $542 billion and $285 billion in 2020 and 2019, respectively, with ESG funds currently representing 10% of global fund assets.
Meanwhile, topics surrounding green and climate finance, both in public and private sectors, are expected to be high on the agenda of the upcoming COP27 in Egypt, especially as the COP 26 laid the ground for discussions on compensations to developing countries damaged from climate change effects. In addition, the European Commission has finalized its “sustainable finance taxonomy” rulebook on which corporate activities can be labeled “climate friendly”.
Trends shaping the ESG landscape in maritime
In the maritime sphere, “’environment” constitutes the fundamental pillar where companies develop their ESG strategies. Decarbonization and other environmental issues come to the fore but there are also other key topics that will impact long-term decision making in the sector. According to the Global Maritime Issues Monitor 2021, talent shortages loom in the background as a result of the crew change crisis, digital issues re-emerge as a priority in light of recent attacks and economic and geopolitical issues have been overshadowed by environmental issues.
Several of the latest insights into ESG pinpoint greenwashing as a main challenge to manage in the near future. Current estimates show that greenwashing may increase as ESG becomes more and more important to investors, sparking more stringent regulations. While many corporations release ESG-related data in 2021, there is an increasing skepticism by investors, regulators, and the broader public that these corporations may be using misleading facts as a marketing tool to embellish their environmental achievements.
Meanwhile, a recently increasing trend of shareholder activism puts pressure on companies to support for ESG-related proposals, with the most recent example being the pressure of shareholders to oil majors Exxon Mobil and Shell to be more ambitious in emissions cuts and shed bigger focus on gender equality, both constituting hot topics in the current shipping landscape.
How shipping companies can manage ESG issues
Transparency and consistence in reporting, are of the essence, since ESG will be increasingly linked to the reputation of a company and inevitably its ability to remain competitive in a highly competitive market, PwC has noted. The following steps are fundamental for effective ESG monitoring and reporting:
- Identify ESG topics and key stakeholders
- Raise awareness around ESG topics and ensure top management commitment
- Assemble a project team with suitable skills
- Select an appropriate ESG Framework and criteria that will cover stakeholders’ needs
- Record processes and controls relevant to the processing of sufficient appropriate ESG data
- Identify and assess relevant risks and their impact on ESG reporting
- Implement improvements required to safeguard ESG data relevance and integrity
- Report on ESG performance
- Invest in training staff ashore and on board
- Monitor ESG and ESG reporting on a continuous basis
- Foster an ESG-driven culture
- The way forward for ESG in shipping
In an era of continuous transformation across all sectors and a global recognition of the need for sustainability, it is beyond doubt that financial actors are more demanding on ESG performance, requiring not only 100% transparency across all data, but also strong indications that a company’s culture is driving beyond compliance. This is evident in an increased interest observed in ESG from stakeholders across the business sector in the last two years, a trend expected to keep rising.
And while the shifted interest of shipping towards ESG leaves us with a “wait and see” approach regarding the progress in popularity of Poseidon Principles, on how aggressive the IMO decisions will be in the sphere of GHG emissions in the near future, as well as the extent to which the financial sector will prioritize “greener” shipping companies from competition, it is most likely that the environmental pillar will maintain a leading role in the formulation of ESG strategies by maritime organizations in the coming years.