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Two leading bankers explain the framework’s importance to the shipping industry.
Launched by the Global Maritime Forum (GMF), an international foundation dedicated to promoting sustainable shipping in the carriage of world trade, the Poseidon Principles (PP) are the brainchild of eleven founding signatories and supporters – Citi, Société Générale, DNB, ABN Amro, Amsterdam Trade Bank, Credit Agricole CIB, Danish Ship Finance, Danske Bank, DVB, ING and Nordea, supported by the GMF, University College London Energy Institute, the Rocky Mountain Institute, LR, A.P Møller- Maersk, Cargill and Euronav.
Two of the principal bankers leading the initiative head sector-leading lending institutions based in the US and Norway. Michael Parker is the London-based Global Industries Head for the Shipping, Logistics and Offshore industries of Citigroup and Kristin Holth is Executive Vice President, Global Head of Ocean Industries at DNB in Oslo. Both have been closely involved in the PP drafting process.
Parker sees the initiative as an essential driver in support of the IMO’s ambitions between now and 2050. “As a result of this move, capital will only flow in the right direction,” he told Horizons, “and a customer’s approach to sustainability will be a key measure. We will help our clients to find a way of ensuring that capital invested goes towards efficient clean shipping and no longer, as it has done in some cases, towards speculative asset play.” “What this does is it shows shipping’s direction of travel,” declared DNB’s Holth. “This is the world’s first sector-specific climate alignment financing initiative and it will establish a framework for banks to assess and disclose their climate alignment status on a portfolio basis.
“Each of us will have to find a way of introducing a climate alignment component into our lending activities and credit decisions. Our loan books are, of course, all different, comprising different owners, ship types and geographical operations. What is important, though, is that the base information per vessel will be the same for all banks.”
How will Poseidon Principles work?
In practice, member banks will use quantitative methodologies to assess their existing portfolios and future transactions will be gauged in terms of climate alignment. The UN body’s data collection system, now mandatory for all vessels of 5,000gt or more, will provide a convenient gauge.
Under amendments to MARPOL, ship operators’ data on fuels consumed on board, as well as transport work undertaken, must be recorded and logged with flag states annually. Made available to financial institutions, this data will enable them to calculate their overall portfolio alignment, as well as identifying laggards in the sustainability advancement process. DNB’s Holth sees introducing the PP as a two-stage process. The first stage – agreeing and drafting – has now been completed. Implementing the principles is the second stage, and this will take some time.
In practice, Holth said, DNB already undertakes regular client reviews to assess shipowner strategies on various criteria, including sustainability, vessel performance initiatives and ship recycling strategies. But, she said, the bank will now be taking things a stage further, asking its clients how they plan to adapt their businesses to meet future climate alignment ambitions. “The key thing is alignment with the IMO and I think things will move much faster now,” said Citi’s Parker. “And there is no stopping any signatory from going further if they wish.”
Why is this so important for shipping?
The PP are an absolutely essential process. LR’s CEO, Alastair Marsh, has declared that zero-emission vessels must enter the fleet by 2030 at the latest if the maritime industry is to stand a chance of meeting the IMO’s ambition of achieving at least a 50% reduction in greenhouse gas emissions by 2050 compared with 2008 levels. His views are based on Lloyd’s Register’s sector-leading research into how the IMO’s 2050 ambitions can be achieved.
Katharine Palmer, LR’s Head of Sustainability and one of the authors of the classification society’s studies, encourages the industry to truly engage and collaborate in the potential pathways discussions immediately to ensure they successfully plan for the future.
The entire marine community playing a part in ship construction and operations over the next decade must consider the implications of design choices today to ensure that the ships will meet the future requirements. Adopting new technologies, operational optimisation, and design improvements to raise the productivity of existing vessels are all essential to meet the IMO’s interim ambition – a 40% reduction in greenhouse gas emissions by 2030 compared with 2008 figures.
Shipping’s journey to zero-carbon
As with any industry evolution, there are the highly progressive sector pioneers whose managers are already investing in the fuels and digital technologies of tomorrow. For the other thousands of maritime stakeholders, the journey must now start, and they must now engage to plan for the future.
DNB’s Holth surmised “we already see a big change that has been taking place for at least the last 18 months”. “And the change in approach applies to capital generally, not just plain vanilla debt,” she added.
“The financial market focus is changing, and banks are already assessing their clients’ environmental, social and governance (ESG) criteria and what they plan to do to their business models and ships. From a client’s point of view, they will have to be asking themselves: what are the best proactive steps we can take to improve our ships’ efficiency, and what will be the impact on us if we don’t do anything?” Holth went on to add “we will see how companies handle new requirements and have a continuing dialogue. Clearly this is not an overnight business, but clients not taking the environmental challenge seriously will have to think through the consequences. Capital will, over time, tend towards those having a responsible business.”
Parker also feels that the shipping industry, as the primary conduit of world trade, should definitely have more support from governments and regional economic bodies. He highlighted the success of Norway’s NOx Fund, which has proved a successful catalyst in the pioneering of a range of green shipping technologies. Governments could develop similar initiatives, Parker said, and global capital markets could introduce new financing products such as shipping-specific green bonds as a financial catalyst for innovative projects that make sense.
Class societies, he suggested, should play a key role in helping investors and lenders decide how and what to finance. Where capital goes in the future is extremely important and the societies are well-placed to identify the most promising of the new technologies, he said. Accompanied by previous LR and UMAS studies, including Low Carbon Pathways 2050 and Zero- Emission Vessels 2030, LR is uniquely positioned to provide expertise to the Signatories of the Poseidon Principles, ensuring that lending decisions protect and help those who are planning to finance, design or build a ship in the 2020s and who will need to consider how their ships can switch to non-fossil fuel later in its operational life.
Finally, Søren Toft, Chief Operating Officer and Executive Vice President of A.P. Møller-Mærsk, said “Shipping’s decarbonisation will require unparalleled innovation. A modern ship is a highly capital-intensive asset with a typical life span of 25-30 years. To deliver on ambitious climate targets, zero-emission vessels will need to enter the fleet by 2030. This leaves us only ten years to develop the new marine fuels, propulsion technologies and infrastructures that will be required. The Poseidon Principles will help us catalyse this transition.”