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Decarbonation of shipping - The role of banks

It is evident that shipping is heading towards a green change and that the shipping industry is changing rapidly. Do banks embrace their corporate social responsibility and take the lead? Where are we today - and what is the status of the banks?
Logistics and transportation of International Container Cargo ship in the ocean, Freight Transportation, Shipping

Initially, shipping does not fall within the Paris Agreement. Therefore, the Environment Committee of the International Maritime Organization (IMO) agreed in 2018 on a separate, ambitious plan to reduce greenhouse gas emissions. The long-term goal is total decarbonization by 2100, but as of today we do not know how shipping, which is already the most climate-friendly mode of transport, can be decarbonized. In order to reach the 2100-target, there is a consensus on greenhouse gas emission reductions of 50% by 2050, based on the emission level in 2008. An increase in shipping is expected up to 2050, and the sub-target of 50% reduction by 2050 will therefore in effect mean a reduction in greenhouse gas emissions of about 70%. The more short-term picture calls for a 40% reduction of emissions by 2030.

Although there is currently no clear solution for reducing carbon emissions of shipping, a number of measures are being taken to reduce emissions and make shipping more environmentally friendly.

Among other things, the IMO has decided that from 1 January 2020, it is only permitted to use fuels with less than 0.5% sulphur, down from a previous limit of 3%.

Shipowners have also taken a number of measures to make their operations more environmentally friendly. We now see, among other things, extensive use and installation of purification facilities for the vessels’ exhaust gas (scrubbers), several shipowners are contracting new ships with hybrid propulsion as a substitute for traditional propulsion machinery, and some shipowners also consider other alternatives such as installation of rotor sails and the like.

Norwegian and international banks and financial institutions have been very willing to finance such climate-friendly measures, which clearly shows that banks and financial institutions are also aware of their responsibility regarding financing of “green measures”. For a long time, the largest banks have been committed to sustainability and corporate social responsibility in the marine industry and supported, among other things, the OECD’s guidelines for multinational companies, UN Guiding Principles and CDP climate reporting. We see that the leading shipping banks are now putting climate risk very high on the agenda and will now measure and publish the carbon footprint on their own loan portfolios.

As a result, the leading shipping banks have taken the initiative to agree on a method for measuring the climate imprint of their shipping portfolios. The results of these measurements are scheduled to be published annually. These principles have been named the “Poseidon Principles”. This is an important first step towards a greener shipping portfolio for banks and a tool for raising awareness and developing a strategy for change. As of today, no specific target has been set for reducing emissions from the respective loan portfolios, but it is assumed that the purpose behind such reporting and disclosure is that the banks in the long term will turn loans within shipping towards ships with lower emissions, and to make customers conscious of their environmental responsibility.

The Poseidon Principles is the first initiative that loan customers will notice directly on the management of their respective loans. When the banks measure the climate imprint on their own loan portfolio, this entails the need to collect information from the shipowners. As of 2019, the shipping companies will report emissions to IMO, whereby the emissions are calculated on the basis of fuel consumption, sailing distance and cargo capacity. This is similar information that the banks initially also want from their customers, so a report to the banks as of today should not lead to significant extra work for the shipowners.

For most banks that grant new shipping loans, such loans are now granted, inter alia, on the condition that the shipowners will agree to submit such information as is necessary for the respective banks to fulfill their reporting obligations in order to carry out a calculation of the climate imprint. For the banks that have agreed to the Poseidon Principles, a set of standard clauses have been created and incorporated into the loan documentation. Those banks that have not agreed to the Poseidon Principles have also widely chosen to incorporate corresponding information clauses in the loan documentation to ensure access to the necessary information in order to inter alia measure the climate imprint on their own loan portfolio.

The Poseidon Principles are intended to evolve over time as the IMO develops its climate ambitions and regulations. The changes are happening fast and the principles will probably be subject to revision and perhaps most importantly clarifications in the time to come.

The law firm Simonsen Vogt Wiig has been advising several of the largest banks and other large financial institutions in relation to financing scrubbers and other environmentally oriented measures. SVW has also assisted several banks in the preparation of new standard clauses for reporting, and information flow for climate imprinting. The changes happen fast so it is important to stay updated.