The focus of the world seems to be finally shifting towards the issue of climate change, albeit slowly. Recently, even billionaire founder of clothing brand Patagonia Yvon Chouinard, gave away his entire company to a trust, the proceeds of which will go towards fighting climate change.
The shipping industry is a traditional one, it typically responds to change at a glacial pace and is frequently under the limelight although it only accounts for 2.5pc of the total global CO2 emissions. The industry has come under criticism as it was not part of the Paris Agreement and also because of its carbon, nitrogen and sulphur emissions. The International Maritime Organization (IMO) acted on this issue, implementing a greenhouse gas (GHG) strategy to reduce the carbon intensity of international shipping.
The strategy aims to reduce CO2 emissions, by at least 40pc by 2030, pursuing efforts towards 70pc by 2050, compared to 2008’s levels. But, at minimum, the industry is required to reduce total annual GHG emissions from international shipping by at least 50pc by 2050 compared to 2008.
These targets present challenges to the shipping industry that it is not currently equipped to meet and as a result shipowners are exploring a variety of new environmentally friendly technologies including new fuel technologies, more efficient hull shapes and new methods of propulsion.
But these new technologies are often untested — therefore carrying significant financing risk — and the IMO’s targets set the level of ambition for financial institutions to act on the climate risk under the purview of ship finance, which has led to the establishment of The Poseidon Principles.
These principles set a benchmark for what it means to be a responsible bank in the maritime sector and provide guidance on how to achieve this. The Poseidon Principles are consistent with the policies and ambitions of the IMO and enable financial institutions to align their ship finance portfolios with responsible environmental behaviour and incentivize international shipping’s decarbonization – to shape a better future for the shipping industry and society.
The Poseidon Principles are applicable to lenders, lessors, and financial guarantors globally. They are intended to evolve over time to address other adverse impacts.
Launched in June 2019, there are currently 29 financial institutions as Signatories to the Poseidon Principles, representing over 50pc of the global ship finance portfolio, to the tune of approximately $185 billion. Signatories to the Principles include ABN Amro, BNP Paribas, Bpifrance Assurance Export, Citi, Credit Agricole CIB, Crédit Industriel et Commercial, Credit Suisse, Danish Ship Finance, Danske Bank, Development Bank of Japan, DNB, Export Finance Norway, Finnvera, ING, MUFG Bank, Nordea Bank, OCBC Bank, SACE, SEB, Shinsei Bank, Société Générale, SpareBank 1 SR-Bank, Sparebanken Vest, Standard Chartered Bank, Sumitomo Mitsui Banking Corporation, Sumitomo Mitsui Finance & Leasing, and Sumitomo Mitsui Trust Bank.
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Effectiveness
The principles are still gathering momentum with the number of signatories rising and an increased focus on environmentally friendly measures across the shipping industry.
But there are still some questions around the effectiveness of these going forward as they are reliant on the IMO GHG targets.
The UK P&I Club suggested that: “The shipping industry, along with many other industries, has been severely impacted by the Covid-19 pandemic. In the anticipated global recession that now follows, it may be that the 2023 IMO targets will not be as ambitious as they could otherwise be.”
The IMO targets are closely monitored by the EU Commission and if the EU is not satisfied that any new IMO targets are not sufficiently stringent then it could decide to include shipping in the EU Emissions Trading System (ETS), the UK P&I Club added. The IMO has thus far been pushing back on such a suggestion.
There has also been criticism levelled at the principles as they are not a mandatory measure. As such, major shipowners — particularly those that do not use western financial institutions — need not adhere to the principles.
Benefits and drawbacks of adherence
The burden placed on the shipowner to adhere to these principles is comparatively slight. Much of the information required by the financial institution must already be supplied to the IMO under the DCS scheme. In addition, an owner can obtain a Carbon Intensity and Climate Alignment Certificate from an IMO-approved organisation, which would make it more simple for the financial institution to calculate the relevant data.
But the benefits in this situation could outweigh the potential burden as the principles should allow lenders to negate the financial risk and regulatory uncertainty of shipping industry rules and targets shifting more quickly than expected (e.g. if the IMO revises its targets significantly higher/lower). This lack of risk could lead to a lower cost of finance for shipowners, easing the current transition to a greener shipping industry.
Marine Insurance
Launched in December 2021, The Poseidon Principles forayed into marine insurance, bringing together a group of marine insurance firms committing to aligning their portfolios with responsible environmental impacts. With the same agenda as the original, The Poseidon Principles for Marine Insurance must be applied by Signatories in all business activities where:
- the insurance products cover hull and machinery (H&M)
- the Signatory is the leading insurer, as well as in cases where the Signatory is a follower, but the lead is also a fellow Signatory
- a vessel or vessels which have an established Poseidon Principles trajectory whereby the carbon intensity can be measured with IMO Data Collection System (DCS) data
While the cumulative efforts of the industry players is a display of commitment, the rules obviously seem to be skewed towards a newer fleet. With limited newbuild orders for tankers, speculation of constructive discussions between the US and Iran and the associated return of the ‘shadow’ fleet, much remains to be seen as to the eventual implementation of the Principles and the impact they have on shipping and the climate in general.
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