Asian funding sources could be crucial to success of the Poseidon Principles
Alison Weal, partner at Winston & Strawn, says that greater support from Asian funding source could push the Poseidon Principles to success
Launched in June 2019 by the Global Maritime Forum (GMF), the Poseidon Principles (the “Principles”) are the first global, sector-wide, self-governing climate alignment principles among financial institutions. They redefine the role of financial institutions in the maritime shipping sector and lay a clear path for the financial sector to make new, significant contributions to global decarbonisation. Under the agreement, the 12 founding signatories have pledged to inform all their future lending decisions in light of environmental factors and the reduction of shipping emissions.
In practice, the Principles will ensure that signatory banks take environmental issues into consideration when making decisions on what to finance or refinance in the shipping industry, with signatories making their climate alignment scores public every year to ensure accountability and transparency.
Clearly, this is a positive step forward, building on the momentum generated by the International Maritime Organisation’s (IMO) target announced earlier this year to reduce shipping’s greenhouse gas (GHG) emissions by at least 50 per cent by 2050. It is a timely step too; the shipping industry, powered by bunker fuel, a residue from crude oil that is cheaper than petrol or diesel but significantly dirtier, currently accounts for approximately 10 per cent of total transport emissions, roughly the same as the more publicly criticised aviation industry. On a global level, the shipping industry accounts for two to three per cent of total man-made CO2 emissions at nearly one billion tonnes . This places it between the entire GHG output of Germany at 817 million tonnes GHG and China at 11,601 million .
However, whilst the Principles ensure that member financial institutions now have a regulatory framework for assessing and managing the environmental footprint of their ship finance portfolios, there are a number of challenges that need addressing in order to ensure that the Principles are able to deliver the intended positive change.
The first significant challenge facing the Principles is securing a critical mass of support from financial institutions. The 12 initial, and still only, signatories include one US bank and 10 northern European, representing approximately US$100 billion in investments, which only equates to roughly 22 per cent of the US$450 billion global ship finance portfolio . When the Principles were launched in June, it was anticipated that the industry’s other major lenders and export credit agencies would shortly follow suit and sign up to the Principles. But, so far, they haven’t.
In no way underestimating the significant influence and impact of the 12 lenders currently behind it, they represent a minority backing. Unless this changes, such a lack of support could compromise the effectiveness of the Principles.
Firstly, if enough capital providers do not sign up to the Principles, it is possible that ship owners with high carbon-intensity tonnage could simply look elsewhere for their capital, leaving Poseidon Principles signatory banks with a smaller share of the sector.
Secondly, it could be argued that the current geographical spread of signatories isn’t wholly conducive to delivering the results that the Principles were intended to achieve. Current signatories comprise largely of European lenders – a funding source for shipping that has been pulling back over the past decade, with Asian funding sources becoming more prevalent in the market. Chinese banks are topping the lists of global banks lending in the shipping industry with Cexim becoming the world’s largest shipping lender after overtaking DNB, as revealed by Marine Money last year.
The reasons for such an immediate lack of support from Asian lenders are not immediately clear. Possibly, there is less regulatory pressure on them compared to their European counterparts and this could be a factor behind the slow rate of uptake thus far, with the Asian lenders still considering their positions. Such considerations may include the support that their customers decide to lend to the Principles, and also that of the other major players in the industry, such as the shipbuilders, where the Asian powerhouses China and Korea are world leaders.
The banks could also have a concern that attaching a greater number of environmental regulations and stipulations to whom they loan money may encourage shipping companies to look at alternative forms of capital. Such forms of alternative capital may originate from private equity investors, which are not regulated in the same way as banks and consequently may not have the same considerations when deciding where to invest. Not being beholden to the Poseidon Principles puts the Asian banks on a similar footing to private equity investors as regards environmental requirements in credit decisions, and potentially puts the Asian banks in a more competitive position vis-à-vis the Poseidon Principle signatories.
It is becoming increasingly clear that, while banks have a key role to play in getting behind the Principles to encourage shipping companies to drive down their carbon footprints, the success of the Principles is very dependent on the willingness of shipping companies to take such regulations seriously and adopt a greener approach to their operations.
Currently, there is nothing to stop shipping companies from turning to non-Poseidon Principles members for finance.
A lack of financial incentive and reward may be a potential blocker. After all, in order for shipping companies to meet the IMO targets, there will be a need for huge investment in advancing green technologies. Simply put, if the industry cannot find a different type of fuel or a different way to power its assets, it will struggle to meet the IMO’s ambition of achieving at least a 50 per cent reduction in greenhouse gas emissions by 2050 compared with 2008 levels. However, finding and implementing such solutions is extremely expensive and requires a substantial investment in time.
To help incentivise such change and innovation, it has been suggested that governments and regional economic bodies need to be seen to be playing an even bigger role in supporting advancements in greener technology, funding research and rewarding those companies who spearhead the green evolution. In Norway, for example, the creation of a NOx Fund in 2008 decreased nitrogen oxide emissions by 44,000 tonnes and it has been suggested that the maritime industry should consider a similar model to support research, development and deployment of zero carbon technologies across the world fleet . Other routes to incentivise innovation in green technologies could include financial institutions funding more new products, including shipping-specific green bonds.
It is not just about shipping companies looking to the future either – shipping companies also need to fully embrace existing technology to help them identify and better manage the carbon footprints of their fleets. We are already seeing ships becoming sophisticated sensor hubs and data generators, producing and transmitting information from anywhere, often in real time, and companies need to ensure that they are using this data effectively to inform where the most impactful changes can be made to their fleet in order to reduce emissions.
The last 12 months have delivered a much-needed focus on driving down the carbon emissions of a sector that has a huge opportunity to positively contribute to the global aims outlined within the Paris Agreement. Over this time, it has become increasingly important that companies take responsibility for – and control of – their own green framework, with the potential of legislation and optional frameworks restricted by uptake. The Principles will undoubtedly act as a catalyst in helping the industry to achieve challenging targets, but this could be helpfully backed by cross-party frameworks that are well aligned for cohesion and a common goal across the industry.
Regardless, the introduction of the Principles and the initial support of the 12 signatories should be applauded as they seek to drive forward progress from all areas of the industry. But it is vital that we ensure there is no complacency and continue to build on this positive momentum. Key to this will be securing the support of Asian lenders for the Poseidon Principles, illustrating that the support for the initiative exists across the sector, and encouraging greater government support for shipping companies at a time when it would be most welcome.