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Does net zero leave shipping facing a capital-constrained future?

The industry’s race to net zero is already weighing heavily on banks’ lending decisions to shipping

Banks are aligning their lending capacity to the newly increased net zero trajectory for shipping. The natural conclusion of this process will be a reduction in shipping finance from banks. Capital will increasingly only flow in the direction of those companies with the ‘right’ decarbonisation strategies

THE prospect of capital steering clear of projects and assets unaligned to the raft of green policies towards which Western financiers have been gravitating over recent years, has been little more than mood music for shipping.

The increasing requirements of transparency have generated an audible background hum of concern, certainly — but the focus has largely been forward-looking.  

However, that is about to change — and the volume is being turned up to a level that is going to be much harder to ignore.

By April 24 next year, the lenders representing two-fifths of global banking assets who have signed up to the Net-Zero Banking Alliance will have formally completed their forecasts for 2030.

In this way, they are effectively committing themselves to a climate trajectory that will require hard decisions about what stays in their portfolios.

This week, the signatories to the Poseidon Principles — the climate alignment agreement among financial institutions whose members are committed to measuring and reporting the carbon intensity of their loan portfolios — are due to vote to formally up their trajectory in line with the new International Maritime Organization emissions-reduction targets. 

This is no longer simply a question of transparent reporting of environmental, social and governance ratings; shipping’s emissions are already affecting access to capital. 

“The industry should be much more concerned than it is right now about where its capital is coming from, because we work with a lot of institutional capital providers and we have definitely seen significant diversions of capital away from shipping,” said Christophe Toepfer, chief executive of the maritime investment firm Borealis Maritime.

Once providers have to include so-called Scope 3 emissions — essentially the emissions for which a company is indirectly responsible up and down its value chain — then shipping immediately becomes a very unattractive asset class in which to invest. 

Toepfer recalls a recent lunch with a banker who reported that he would love to lend to shipping, but doing so would have tipped his bank into the red when it came to its decarbonisation targets.

And this was far from being an isolated case of a banker becoming wary of shipping’s ‘difficult’ status in the green transition.

“Capital is already struggling to continue investing into shipping on the debt and equity side,” said Toepfer.

“And, at the same time, we have a mountain to climb ahead of us as we try to rebuild the fleet over the next 10 or 15 years, with new technology and new propulsion systems. There are significant challenges ahead of us.”

When the 30 signatory banks to the Poseidon Principles vote this week to align their targets with the IMO’s recently increased ambition to reduce greenhouse gas emissions in the industry to between 20% and 30% by 2030 — and 70% to 80% by 2040 — that will have a tangible impact on lending decisions and strategy. 

The Poseidon members collectively represent about 65% of global ship finance, but lending decisions to shipping are not being taken in isolation.

Banks have to balance shipping’s decarbonisation trajectory against other asset classes, while also considering their wider commitments to climate frameworks. 

So if shipping cannot align with these upped goals, that capital that will go to another industry.

“There is finite capital that the bank has — and it will be given to those businesses that can align themselves with the wider targets that the parent bank is giving,” said Paul Taylor, global head of maritime industries at Société Générale and vice-chair of the Poseidon Principles.

“If they can’t do that, it will be invested in other industries, not the shipping industry.”

Ultimately, that will result in a cutback in shipping finance. 

“It is going to drive capital towards the green projects — and not just the green assets, but those shipowners who commit, those who actually have a strategy towards 2050,” said Taylor.

Here, the details are another concern for shipping. 

One problem for financial institutions is that so few of the companies to which they provide services have credible decarbonisation plans, making it difficult for them to cut their financed emissions — particularly those that fall under Scope 3 emissions. 

According to a recent report from EY, only 5% of FTSE 100 companies have disclosed detailed, actionable net-zero plans, though 80% have committed to becoming net zero by 2050.

While such considerations have been quietly tying European bankers up in knots as they consider the implications of their green commitments, rivals in Asia have proved to be less concerned. 

Western banks ceased being the dominant providers of shipping finance several years ago. Last year, the European share of bank lending to shipping fell below 50%.

“The banks might be restrained by regulation, but actually, there will always be some form of alternative finance available; it just comes at a price,” noted Kavita Shah, a partner in the asset finance group at Watson Farley & Williams.

While efforts like the Net-Zero Banking Alliance and the Poseidon Principles promise to align portfolios to net-zero emissions by 2050, they can only tackle part of the equation. 

As long as demand exists and institutions can make a profit from investing in shipping, someone, somewhere will provide funding — with or without a credible ESG rating. 

This article is part of Lloyd’s List’s special report on ‘Shipping Finance’ which can be viewed here

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