A recent study by the UCL Energy Institute highlights a significant gap in how banks incorporate climate risks into their lending practices for the shipping industry.
Despite growing awareness and efforts toward decarbonization, the carbon intensity of individual ships does not significantly affect loan terms. While banks have begun to factor in climate scores since the Paris Agreement, this consideration is applied at a corporate level rather than on an asset-by-asset basis.
For example, membership in the Poseidon Principles enables lenders to offer companies with higher climate scores a 4% lower loan margin. However, this discount is not extended based on the carbon intensity of individual ships.
Do you know what Poseidon Principles stand for?
The Poseidon Principles set a global benchmark for what it means to be a responsible bank in the maritime sector and provide actionable guidance on how to achieve this. Under the pledge, signatories commit to measure the carbon intensity of their shipping portfolios on an annual basis and assess their climate alignment relative to established decarbonization trajectories. This assessment is based on a methodology, tailored to shipping.
Interviews with industry professionals reveal that banks have been collecting more data on the climate performance of shipowners and their assets over the past decade. Despite this increased data collection, integrating this information into loan pricing remains ambiguous. ESG and climate factors are considered, but they are not yet quantitatively included in risk models. Instead, they are evaluated separately through detailed ESG scoring and transition risk assessments.
According to Dr Nadia Ameli, Principal Research Fellow at UCL Energy Institute, to catalyze the transition, voluntary commitments alone are insufficient. Rigorous regulations mandating emissions assessments and imposing tangible consequences for high-carbon portfolios are essential to ensure that financial institutions prioritize climate-friendly investments.
