How Decarbonizing Shipping Just Got a Push – From Banks
Come join researchers and practitioners from around the world at the first international Drawdown Conference, Research to Action: the Science of Drawdown, from 16-19 September at Penn State University.
Decarbonizing transportation is vital to solving climate change. Solutions to decrease transport emissions have been largely focused on motor vehicles—moving people and goods across the globe. While the trend for electric mobility, including e-vehicles, e-bikes, and e-buses, is encouraging, other parts of transport have lagged.
Shipping, the main artery for trade, is one of them.
Although the shipping industry is responsible for 11% of the transportation sector’s total greenhouse gas emissions (GHG) and 3% of global GHG, the industry did not set specific emissions reduction targets during the 2015 Paris Agreement. Project Drawdown ranks decreasing shipping emissions 32 out of 80 as the most impactful solution to solve climate change: roughly 8 gigatons of GHG can be avoided by 2050 with a 50% efficiency gain in international shipping, saving $1 trillion over the lifetime of ships.
First key question: how does the shipping industry decarbonize by 2050?
Scaling known efficiency interventions and innovation are needed—both in supply chains and carbon-neutral fuels. Maersk, the world’s largest container shipper, announced in 2018 that it would have carbon neutral vessels by 2030. Additionally, that it would cut its net carbon emissions to zero by 2050. Furthermore, Maersk has begun to improve efficiency with technical retrofits, including network optimization, new bulbous bows, propellers and engine modifications.
All of these changes require investment. The next key question: how can the shipping industry finance the transition?
Investment in new shipping vessels varies, with a total annual investment of about $130 billion. The shipping industry is overwhelming underwritten using bank debt, with several financing particularities, including:
- High capital intensity (the average capital expenditure of a new-building vessel is about $40 million);
- Volatile financial metrics (including unpredictable revenues, cash flow, and asset values);
- High liquidity (active second-hand market).
Ship-lending banks, therefore, consist primarily of corporate and investment banks having specialized shipping departments, offering term loans of 2-10 years. These banks are some of the best positioned financial institutions to support the shipping industry with decarbonisation capital. Especially, as it relates to efficiency gains where there is little to no technological risk.
Officially announced in New York City on the 18thof June, the Poseidon Principles call for banks to annually measure the carbon intensity of their ship-lending portfolio and to then align with decarbonization pathways. This dual-pronged approach resembles that of a global, financial industry-led effort that includes the Platform for Carbon Accounting Financials (PCAF). Now covering nine asset classes: sovereign bonds, listed equity, project finance, mortgages, commercial real estate, corporate debt, corporate/SME loans, indirect investments and motor vehicle loans.
The Poseidon Principles call for the assessment of climate impact, accountability, enforcement, and transparency. They are currently signed by 11 banks that collectively finance $100 billion in shipping annually. These banks include ABN Amro, Amsterdam Trade Bank, Citi, Credit Agricole, Danish Ship Finance, Danske Bank, DNB, DVB, ING, Nordea, and Société Générale. The emphasis on climate impactis key, as it leads to taking action nowfor mitigating climate change.
While the Poseidon Principles seek to grow in signatories, the work of adopting a financed emissions methodology to ship-lending must now take place. It is expected that this will lead to new financial products that are geared towards both vessel efficiency retrofits. In addition, also leading to the decarbonization of shipping fuels (including advanced biofuels and hydrogen-based fuels). The latter will require a combination of R&D and high-risk capital that banks are not the best positioned at delivering. The Principles are a start.