SHIPPING’S largest lenders have reported further improvements in the carbon intensity of their loan portfolios, but in doing so have revealed the full extent of the gap left to close on their most recent net zero commitments.

The figures also call into question the future willingness of banks to continue lending to some asset classes, most notably passengerships, that are proving to be an anomalously large drag on their overall emissions scores. 

Signatories to the Poseidon Principles, the framework for measuring and reporting the alignment of financial institutions’ shipping portfolios with climate goals, on Thursday published their fourth annual set of climate scores in what the group described as “a pivotal year”.

The banks, which collectively represent just over 80% of the global ship finance portfolio, revealed an average 7.7% improvement in their overall scores from last year. That improvement was based on a range of market factors ranging from Russia’s war in Ukraine to the effects of normalisation from the impact of Covid-19, however, overall it suggests a pattern of banks working with shipowners who are consciously trying to improve the operational performance of their vessels.

But that performance, which records emissions from 2022, was measured against the IMO’s initial GHG Strategy ambition of a 50% CO2 reduction by 2050.

In the wake of the IMO’s agreement this year in July to increase its ambition, the Poseidon banks agreed to align their methodology with the IMO’s stated goal of achieving net zero emissions by or around 2050, along with emission reduction milestones in 2030 and 2040, while employing a comprehensive lifecycle well-to-wake approach and broadening coverage to include a more extensive range of greenhouse gasses.

The new reporting requirements offers an initial baseline assessment of where the banks sit in relation to the new upped goals. Inevitably, the steeper trajectory sees all banks now significantly misaligned with the IMO’s targets.

Under the scoring system devised, a positive score indicates misalignment with the decarbonisation trajectory while a negative or zero score indicates alignment. 

In the easiest “minimum trajectory”, the banks were collectively, on average, 27.2% misaligned and in the “striving trajectory” calculations the banks were 32.1% off target.

But those averages hide a wide spectrum of results where some scores under the new calculations were significantly more out of alignment than others.

BPI France Assurance Export, for example, clocked up an average portfolio alignment score of 92.8% misalignment compared to the “striving trajectory”, despite reporting an overall improvement on last year’s score when measured against the old trajectory.

Italian export credit agency SACE found itself 83.3% off the striving target.

Even in banks with portfolios found to be ahead of the required trajectory under the previous IMO metrics, there are now serious misalignments to deal with, largely influenced by the portfolio mix.

While Germany’s main development bank KfW IPEX’s book is well aligned with the initial IMO strategy, coming in at a very respectable -9.8% this year, the report under the new trajectory reveals an 80.1% misalignment in its cruise book measured against the striving trajectory.

The heavy misalignment of cruise fleets in particular has caused some concerns amongst the banks now finding themselves with a climate score that is significantly off target.

The source of that misalignment appears to be the demand forecasts that the calculations are based on. For cruiseships in particular, the fleets are forecast to have a higher demand growth than the total fleet’s average growth rate, effectively requiring a greater rate of reduction in greenhouse gas emissions intensity.

Given the number of banks left exposed with cruise lending on their books, those calculations are likely to come under serious scrutiny as the new methodology develops over the coming years.

KfW has already noted in its supporting statement for this year’s report that it will be requesting “a more reasonable measurement” from the Poseidon’s technical committee for following reports.

While the immediate numbers for this year will be viewed in the context of changes that now need to be made over several years, the misalignment with the IMO’s strategy suggests the banks will need to make some hard decisions in adjusting their portfolios and thus affect lending decisions to shipping.

Several of the Poseidon banks are understood to already be concerned that the new scoring system will effectively commit them to significantly reducing the size of their portfolio.

While the Poseidon Principles was initially conceived as a transparency exercise, committing banks to disclosing the climate alignment of their shipping portfolios, capital allocation will effectively start to be driven by how aligned individual portfolios are with the agreed trajectory. Banks on the wrong side of that trajectory face the prospect of either continuing to lend despite the public commitments, finding a lot of zero-emissions ships to lend to very quickly, or significantly contracting the size of their book.

There is also the consideration that banks are having 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 will simply go to another industry.

Despite the challenges ahead, the banks remain committed to the Poseidon project, according to Michael Parker, chair of the Poseidon Principles and chairman of global shipping, logistics and offshore at Citi.

“By committing to net zero emissions by 2050 and establishing emission reduction checkpoints to report against, the Poseidon Principles are not just meeting regulatory standards; we are setting the bar higher for responsible and environmentally conscious ship finance,” he said.