The maritime industry occupies a meaningful position in global efforts to reduce the impact of human activity on the environment. Its contribution to our climate reality, particularly through emissions, is comparable to highly industrialised nations such as Germany and Canada. The industry emits around 940 million tonnes of CO2 annually and is responsible for about 2.5% of global greenhouse gas (GHG) emissions.
However, the shipping industry is more difficult to regulate than other industries. Its players are diverse, and the service covers every corner of the globe and our lives. Therefore, responding to maritime regulations isn’t just a matter of compliance, but a call to action towards investing in the sustainability of one of the world’s most important industries.
The International Maritime Organization (IMO) is the specialized UN agency that regulates both marine (under water) and maritime (above water) affairs. It has outlined a three-pronged approach to achieve environmental (and social and governance by extension) targets for the shipping industry. The measures in its approach are:
- Policies and Regulation – which IMO is responsible for.
- Operational Measures – such as speed reduction and retrofitting.
- Market-based Measures – incentivising emissions reduction.
We shall apply an environmental, social and governance (ESG) focus on the role of market-based measures in general, and financial markets in particular.
International Shipping and Financial Markets
There have been two shifts in the relationship between the maritime sector and financial markets. Firstly, a value shift; the focus is now on improved operational performance and not traditional asset trade. The financial incentives for improved performance can directly appear in a shipping company’s financial statements. Improving vessel management produces increased energy efficiency, which comes with lower emissions. Improved operational performance can lead to preferential access to finance as energy efficient ships are more competitive ships. They cost less to operate, and some of these savings get passed on to the consumer. As shipping results in over 90% of the world’s trade by volume (and nearly 80% by value), savings at that scale have positive far-reaching impacts that carry its value along the supply chain.
Secondly, the shipping sector has had to shift (or broaden) its relationship with capital. Traditional financial sources are no longer as popular or viable. Credit fallouts and increased asset prices make shipping a highly volatile sector for traditional sources of capital. Subsequently, ship owners have had to engage alternative, or even hybrid, sources of finance. This has a knock-on effect as alternative sources of finance come with unique requirements. The increasing trend, as seen in global financial markets and the emergence of the Poseidon principles, is that new sources of capital are placing greater emphasis on non-financial returns. A new risk management language must be articulated to help shipping companies not only navigate these financial shifts, but also to make the most of them. This is how ESG in the shipping industry can best be employed.
Data & Sustainable Shipping Finance
The rate at which ship owners, charterers and the maritime financial market have embraced and utilised increased ESG reporting requirements is bringing the sector closer to achieving beneficial sustainability outcomes. Data has long been an area of collaboration between the shipping sector and financial markets.
David Smith, shipping co-leader at Price Waterhouse Coopers (PwC) posits that the visibility of the maritime sector data to financial institutions is heightened by the need for innovation and new operational and management systems. Investments prior to the pandemic demonstrate this, with US$1 billion worth of venture capital investment into the maritime sector in 2019 allocated to tech and vessel connectivity solutions. This is the first time venture capital investment into shipping has reached that quantum.
ESG and the Dual-bottom Line.
Ultimately, the ability of the shipping sector to further attract capital lies in its capacity to internalise ESG externalities and comply with the non-financial monitoring and reporting requirements of the financial sector. The shipping industry will enjoy a more fruitful relationship with the financial markets through a more rigorous adoption of ESG factors in its operational and commercial activity.
EBS Advisory, as a leading strategic ESG advisor to financial institutions, can leverage its ESG and financial expertise to the maritime sector, helping actors realise value and achieve impact objectives.