The shipping industry is a major contributor to harmful air pollution, generating an estimated 2.5 percent of the world’s greenhouse gas emissions. In a global market, the maritime transport sector is depended on as a reliable and cost-effective means of transporting goods. The huge volume of shipping activity and direct impact of the industry on carbon dioxide emissions have led the shipping industry to become the focus of several new green shipping initiatives, particularly in the European market.
What can be done?
It is recognized that technology exists that could cut emissions from the shipping industry by at least 75 percent, but the industry has lagged behind in reducing its carbon emissions and promoting sustainable practices. However, there have been recent signs of change; in February 2018, two Japanese companies announced a partnership to test using solar power on ships and China launched its first all-electric cargo vessel late last year, able to carry 2,200 tonnes with every haul.
Many shipowners have demonstrated a willingness to improve their environmental performance. For example, Cargill has pledged to cut greenhouse gas emissions by 15 percent per cargo-tonne-mile by 2020, in line with the group’s intention to reduce overall emissions by 10 percent by 2025.
Despite their apparent commitment to environmental improvement, owners face a number of challenges to making this reality. Firstly, competitiveness: Investing in greener technologies represents an upfront expense that does not provide owners with a competitive advantage. Users of shipping services are not always willing to pay for goods to be transported in a more environmentally friendly manner, although stricter emissions standards will ensure a more level playing field in this respect. Secondly, the availability of financing: For various reasons, many commercial banks have reduced their lending to the shipping industry. Some banks decided to withdraw from the sector following the 2008 financial crisis. In addition, commercial banks have limited capital and tough choices to make. Ship financing is not always an easy sector to be in, given its high levels of capital utilization, cyclicality and associated risk.
What does this mean for ship finance?
The European Investment Bank (EIB) has signalled its desire to clean up the industry, announcing its Green Shipping Financing Programme, which provides advantageous financial terms to sustainable projects. The initiative (also referred to as the Green Shipping Guarantee Programme) aims to support the financing of new, greener vessels, alongside environmentally friendly retrofittings of existing ships. The €750 million project focuses on sustainable shipping, promoting the adoption of alternative fuels such as LNG and ballast water treatment technology. The framework guarantee agreement ensures that advocates of sustainable projects benefit from favorable financial terms, which stem from the EIB’s AAA rating.
As part of the Green Shipping Financing Programme, the EIB has signed framework agreements with Société Générale, ABN AMRO and ING. The facilities will be available to clients with significant European interests, and can be used for projects with a green innovation element covering the construction of new vessels or retrofitting of existing vessels. The Green Shipping Financing Programme has already seen some early success. The EIB, Société Générale and Brittany Ferries announced the first financing to be put in place under the program in December 2017. The new vessel Honfleur will be Brittany Ferries’ first LNG powered ferry and is scheduled to enter into service in April 2019. Indeed Société Générale is at the forefront of promoting the use of LNG as a marine fuel. In January 2018, the bank joined SEA\LNG, a multi-sector industry coalition aimed at accelerating the adoption of LNG as a marine fuel.
KfW IPEX-Bank is another bank that has been thinking about the environmental friendliness of the fleet it finances, not only because it wants to promote responsible banking but also because it makes good business sense. Environmental concerns are having an increasing impact on the probability of a ship being chartered and, thus, on the credit default risk. Consequently, KfW has worked with FuturesShip to find out how energy-efficient the vessels it has financed are compared with the global fleet. The first findings from the project are that KfW’s ship portfolio is above average in terms of energy efficiency.
Other initiatives include the Green Loan Principles (GLP), launched earlier this year by the Loan Market Association (LMA). There are currently no “market standard” provisions for sustainable loans and the aim of the GLP is to provide a high-level framework of market standards and guidelines. They comprise voluntary recommended guidelines to be applied by market participants on a deal-by-deal basis and seek to promote integrity in the development of the green loan market by clarifying the instances in which a loan may be categorized as “green.” The GLP are based around four core components: 1) the use of proceeds, 2) the process for project evaluation and selection, 3) the management of proceeds and 4) reporting. The LMA’s indicative categories of eligibility for green projects include pollution prevention and control, and clean transportation.
Another development worth noting is the launch, in February 2018, by the European Bank for Reconstruction and Development and the International Maritime Organization of a strategic partnership to promote sustainable maritime transport. The partnership is enshrined in a Memorandum of Understanding under which the two parties will exchange know-how and experience, and will work to support governments in implementing frameworks for a fair, effective and sustainable maritime industry.
Only time will tell what impact these new initiatives will have on making the maritime transport industry greener. In the meantime, it is clear that the industry is moving toward a more sustainable future, and the development of green ship financing is certainly one to watch.