A buzz has surrounded sustainable finance in the shipping industry over the last few years and rightly so. The introduction of the Poseidon Principles in 2019 brought into strong focus the need for financiers to find ways to encourage greener shipping, argues Susan Riitala, Transportation Industry Group partner at global law firm Reed Smith.
he growth of the Poseidon Principles from 11 to 30 signatories (representing 65% of available ship finance globally) in just three years demonstrates that financiers are paying attention
While shipping is a core part of the global economy, the industry is, unsurprisingly, also a significant polluter accounting for more than 3% of global emissions. In a sector where technological obstacles and lack of infrastructure for alternative fuels have made carbon reduction a huge challenge, going green is no easy feat.
It goes without saying that, through encouraging shipowners to employ more sustainable fleets with the promise of available cash, financiers are key players in the decarbonisation efforts of the industry. However, while the reporting process advocated by the Poseidon Principles is undoubtedly a step in the right direction, figures from the Poseidon Principles Association suggest there is some way to go before all credit is aligned with even the most basic of targets.
According to the 2021 Poseidon Principles Annual Disclosure Report, as markets return to pre-pandemic activity levels, emissions are expected to increase rather than decline unless further action is taken to transition fleets to zero-emission vessels. This is far from the trajectory needed to meet IMO targets.
In apparent response to this, earlier this year the Poseidon Principles Association announced its intention to benchmark financing from signatories to the Paris Agreement’s target of limiting global temperature rise to 1.5°C by the end of the century, as well as reaching net-zero carbon by 2050. This goes further than the existing IMO aim to reduce greenhouse gas emissions by 50% by 2050 and carbon intensity of all ships by 40% by 2030.
The move is not entirely surprising as, outside shipping, the Net-Zero Banking Alliance (an industry-led, United Nations body) is already aiming for net zero in the banking industry by 2050. While approval from the Poseidon Principles signatories will be needed to the new pathway, and further changes may come up after the IMO’s review of its greenhouse gas strategy targets (expected in July 2023), this demonstrates a clear increase in the ship finance sector’s commitment towards more sustainable portfolios.
Of course, the new targets may be a more ambitious goal than many shipowners are currently working towards and the revised benchmarking will mean that owners looking for funding from signatory lenders will find their green credentials tested against a higher bar.
Banks and financial institutions play a vital role in bringing the industry closer to achieving the various targets. Allocation of higher percentages of ship finance portfolios to sustainability and green projects will simultaneously serve to enhance the overall carbon rating of banks and financial institutions under industry initiatives, but will also encourage modernisation of the global shipping fleet.
On the flipside, among the high-profile political pledges and green seas rhetoric, there is increasing scepticism and scrutiny around greenwashing claims and plans that lack detail, depth, and credible targets. As 2030 is fast approaching, there is a need for increased accountability and transparency to combat these claims.
The United Nations (UN) is leading the way here. Having set up a distinguished expert group at last year’s COP26 to examine the integrity of net-zero commitments being promised by businesses, financial institutions and governments, UN Secretary-General António Guterres unveiled the group’s findings at COP27 in Egypt. The report included ten practical recommendations and included a stern warning against greenwashing.
Whilst the recommendations are non-binding, the report is effectively a UN-backed endorsement for verification programmes like the Science Based Targets initiative (SBTi), which will launch a shipping-specific trajectory later this year. Lloyd’s List has reported that the expectation is for several existing shipping programmes, including the Poseidon Principles, to start using the SBTi to tighten the requirements and increase verifiable transparency of emissions reductions, thus hopefully signalling a route away from greenwashing claims.
The good news is, although change is slow, the quest for green seas isn’t over. The launch of the Green Shipping Challenge at the COP27 conference in Egypt is evidence that new initiatives are underway. For example, the UK and the US have agreed to launch a Green Shipping Corridor Task Force that will focus on developing green shipping routes, aimed at helping the sector to comply with above-mentioned the Paris Agreement goal of limiting global temperature rise.
Only time will tell whether the latest changes will have a progressive impact or not. A shift from commitments to action and implementation is crucial because as it stands the targets set for 2030 seem too ambitious to turn into reality. Ultimately, in order to generate substantial (and sustainable) change, all participants in the shipping industry must work together to create a transparent and collaborative environment in which to combat environmental challenges.
The views presented hereabove are only those of the author and do not necessarily reflect those of SAFETY4SEA and are for information sharing and discussion purposes only.