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Shipping banks align lending decisions to decarbonisation targets

The Poseidon Principles — a global framework for measuring the climate impact of bank’s shipping portfolios — will for the first time integrate climate considerations into lending decisions to incentivise maritime shipping’s decarbonisation

Banks to disclose climate alignment of shipping portfolios with International Maritime Organization’s 50% emissions reduction by 2050 strategy

ELEVEN banks with a collective shipping portfolio worth more than $100bn will, for the first time, integrate climate considerations into lending decisions as part of a major new initiative launching today to incentivise the maritime sector’s decarbonisation. 

The so-called Poseidon Principles are a new global framework for assessing and disclosing the climate impact of financial institutions’ shipping portfolios. 

With up to 90% of the industry’s major lending banks and export credit agencies, including the major Chinese lessors, targeted to become signatories by the end of the year, the principles represent a significant new financial driver towards the International Maritime Organization’s goal of reducing shipping’s total annual greenhouse gas emissions by at least 50% by 2050. 

They also promise to dramatically change the conversations between shipowners and banks when it comes to the types of vessels and projects that will, or now potentially won’t, get financed.

According to one of the lead architects of the ground breaking new programme, Citi’s head of transport and logistics Michael Parker, the Poseidon Principles are a case of “responsible banks supporting responsible owners” to take the right steps towards a cleaner industry.

“If you look back over the past 10 years and the billions of dollars lost by shipowners and banks as a result of the unnecessary and rather free financing of the industry, I think we now have a responsibility given the role we play to this industry to help our clients find a way of making sure that the capital invested in this industry goes towards efficient clean shipping, and no longer as it did historically towards speculative asset play or unnecessary capacity,” Mr Parker told Lloyd’s List. 

Climate alignment scores

The basic requirements of the voluntary principles will see signatory banks use an agreed methodology to measure the carbon intensity of their shipping portfolios and assess their portfolio’s alignment to established decarbonisation trajectories. The banks will enforce the principles with their clients contractually in all new business and publish their portfolio climate alignment scores annually. 

While the principles make no demands on how the banks assess individual asset lending decisions, this is the first time there has been a sector-specific alignment of banking portfolios to climate goals. 

The process of transparently measuring collective lending decisions against carbon reduction targets therefore imply that there will be a direct impact on lenders’ decision making to shipping clients as portfolios are assessed annually to be either in line with, or out of sync with, the IMO’s decarbonisation trajectory. 

“It’s about measurement and reporting — that’s the basic requirement that each signatory has agreed to, but there is going to be a direct impact on lender’s decision-making,” said Paul Taylor, Global Head of Shipping & Offshore at Societe Generale Corporate & Investment Banking and Deputy Chair of the Poseidon Principles drafting committee.

“We are bringing climate alignment into our credit decisions — that’s the starting point. In the reporting we do whether it’s in the first year of reporting in 2020 or thereafter, what we need to show is that there is a positive trend in the carbon intensity of our lending portfolios,” Mr Taylor told Lloyd’s List.

The Poseidon Principles have been designed to establish a common baseline to quantitatively assess and disclose whether financial institutions’ lending portfolios are in line with adopted climate goals, but they contain no specific targets for the individual banks to achieve “climate alignment”.  

“We’re talking more about direction of travel than quick action here,” explained to Kristin Holth, DNB’s global head of ocean industries, insisting that any changes in decision making for banks as a result of the principles will be directional and at portfolio level.

“Just the fact that we implemented this and we are having conversations with senior management in the [shipping] companies about their corporate social responsibility plans in real detail — that is a significant development where you are already in an interesting dialogue with the company and it's the way that we evaluate where to invest,” she explained to Lloyd’s List. 

“But when you start to measure something it’s for a reason,” she continued. “The CO2 has to be reduced over time… We will have a measurement and a responsibility and we will see if the companies are taking the necessary action and if they're not, then we will have to have a conversation with the company”.

The founding architects of the scheme stress that the principles are neither carrot nor stick — simply an alignment of banking portfolios with climate change principles. Those involved directly in the drafting describe them as a partnership with clients and an exercise in responsible banks supporting responsible owners.  

Evolving ideas

However, Société Generale’s Paul Taylor concedes that as the principles evolve over time, they could end up supporting green finance incentives for some of the banks involved. Whether that goes as far as capital relief for green lending is another step beyond the current scope of the Poseidon Principles, he said. 

“It is certainly something that I would like to see, because I think there is genuine lower risk for banks linked to green shipping projects,” said Mr Taylor. “But so far any attempt to secure capital relief for green shipping loans has not really materialised. There is certainly a momentum towards that and the Poseidon Principles will only help to achieve that goal,” he said. 

“Ultimately green transactions will become the norm. Those companies not doing green transactions will be deemed more risky,” concluded Mr Taylor.

The Poseidon Principles were born out of the Global Maritime Forum and spearheaded by global shipping banks including Citi, DNB and Societe Generale, as well as industry partners including Cargill, Lloyds Register and Maersk.

“Shipping’s decarbonization will require unparalleled innovation," said Soren Toft, chief operating officer of AP Moller-Maersk. "The Poseidon Principles will help us catalyze this transition."

The Principles are intended to evolve over time as the IMO adjusts its policies and regulations and when further adverse environmental and social impacts are identified for inclusion. They also aim to support other initiatives developed to address climate, environment, and social risks, such as the Principles for Responsible Banking, Energy Transitions Commission, and the Task Force of Climate-Related Financial Disclosures.

Founding Signatories include Citi, Société Generale, DNB, ABN Amro, Amsterdam Trade Bank, Credit Agricole CIB, Danish Ship Finance, Danske Bank, DVB, ING and Nordea, and represent around 20% of the global ship finance portfolio. Additional banks are expected to join in the near future, including several major Asian banks and export credit agencies.

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