The concept of ESG is not new in shipping world but the complexity of shipping business, which includes particularly numerous and global stakeholders along with growing discussions on decarbonization and regulatory pressure, as well as the more recent challenges amplified by the COVID-19 pandemic, have all increased the shipping industry’s attention to ESG from multiple stakeholders like regulators and financiers.
hipping companies are continuously required to comply with multiple and constantly changing ESG-related standards and regulations with significant impact on their operations. For example, COVID-19 has shed light on issues around seafarers and their labor and human rights, with several stakeholders increasingly demonstrating their interest in addressing these issues which form part of their social performance.
In addition, the complex and continuously changing maritime environmental regulations, such as IMO GHG strategy, the 2020 sulphur cap, the EU MRV, Inventory of hazardous materials, and others, drive investor uncertainty and require a significant investment in capital expenditures for allowing the maritime industry to comply either in the short, medium or long-term.
ESG performance is now correlated to traditional shipping industry risks; that includes accidents, vessel detentions, pollution incidents and financial loss due to fines or reputational damage.
…explained John N. Cotzias, Projects & Finance, Xclusiv Shipbrokers Inc., in a recent GREEN4SEA talk.
Meanwhile, the financial stakeholders, including banks, investors and insurance entities, seem to increase their ESG requirements from maritime companies who wish to access finance or attract investments. PwC suggests that key stakeholders, such as investors, banks and charterers, will soon expect that ESG reporting will be part of a shipping company’s ongoing reporting. This means a robust set of ESG metrics does not only boost the company’s social standing, but it also enhances long-term business performance.
The three pillars of ESG
ESG stands for Environmental, Social and Governance factors assessing the progress of companies on their sustainability progress. Measuring the three pillars separately, ESG could be considered a form of corporate social credit score. The three pillars are:
- Environment: As climate change and global warming is a key point of focus in global business and society, this pillar relates to the contribution a company or government makes to climate change. For example, ESG reporting in maritime covers topics such as recycling, GHG emissions and other pollution impacts, waste management, energy efficiency, etc.
- Society: This pillar covers business ethics and a wide range of potential societal obligations, such as human rights, diversity, labor standards, animal welfare, and more routine issues, such as adherence to workplace health and safety with accident and safety management. This is where the ‘social license to operate’ (SLO) also applies, which expresses the acceptance of a company’s practices by the public.
- Governance: This has to do with a set of rules or principles defining rights, responsibilities and expectations between different stakeholders in the governance of the companies.
Stakeholders –broadly defined as any group of people directly affecting and affected by the companies’ objectives– include its employees, customers, partners, competitors, regulatory authorities, media, NGOs, etc. For example, stakeholders of a ship owning company include, but are not limited to, the company’s employees, ship operator, charterer, broker, the IMO, classification societies, investors, and more.
Leading companies have realized that people are the strongest advocates and enablers of ESG strategy, and thus a key force for change. Firms cannot be considered separately from their stakeholders and certainly their employees, who typically act as advocates and enablers of ESG strategies, as research has proved the link between an organization’s consistent ethical profile with employees’ desire to retain organizational membership. In the meantime, policymakers are the key drivers of how shipping currently navigates the complex environmental challenges.
It becomes evident that the three parts of ESG are interconnected by human capital. According to WEF, examples of human capital metrics include employee experience and wellbeing -a hot topic in shipping-, the pay gap, diversity, retention, investment in skilling programs, and more.
The way forward
It becomes clear that ESG is linked to sustainability and expresses identifying the fine balance between financial returns, social interests and the environment. According to PwC, finding this balance results in better results for both the company and society. Amid this landscape of increasing pressure to meet constantly evolving requirements, shipping companies are now called to respond to the new ESG monitoring and reporting requirements, measure the ESG impact of their operations and adapt the way they operate.
ESG and the journey towards sustainability requires commitment going beyond regulation. According to World Economic Forum, the growingly ethically conscious world demands from organizations to put ESG principles at the center of their human capital management strategies. In this landscape, human capital must be seen as an asset with associated metrics, establishing a holistic model that will benefit the whole spectrum of stakeholders from investors to business leaders.