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Green finance is having its own revolution

Photo: Blue Communications Sean McLaughlin
The decarbonisation of shipping has sparked a green technology revolution, but pushing it forward is another revolution driven by lenders pivoting towards their own green goals, says Sean McLaughlin, Strategy Consultant.

The shipping finance industry is undergoing its own evolution and revolution. The introduction of clean technologies along with regulations such as the EU Taxonomy are extending the reach of green finance principles across the industry.

The Poseidon Principles, initially for finance and now mirrored in the insurance markets, are already being used as a framework for financial institutions and marine insurers to measure and publicly report the climate alignment of ship finance and marine insurance portfolios with global climate action goals. Signatories have become a major force within the industry, but they are not the only force at work. The EU Taxonomy is soon to be issued, and along with private sector green bond certifiers such as the Climate Bond Initiative and the requirements of public markets such as the NYSE, it will have a far-reaching impact on the green revolution already underway.

Houlder’s recent survey of shipowners from the container, tanker, bulk, cruise, and ferry sectors indicated that most ship owners believe that not decarbonising could become an existential threat to their business. It’s not surprising then that the funders who rely on the earning capacity of ships see the risk to their loan books of not focusing on the environmental performance of those assets.

Shipowners face new demands

The perception of the influence of funders varied significantly amongst survey participants, the biggest variation being between large and small ship owners. Large organisations tend to see access to green finance as being relatively straightforward, with the challenge being finding projects which match the funders criteria.

Smaller owners generally don’t issue their own bonds, but alongside the larger operators they are being asked to meet environmental performance criteria to access finance. They increasingly see the cost of their funding being linked to their environmental performance and can even find themselves risking default on their lending covenants if they fail to meet baseline environmental performance commitments.

While securing effective financing can be a challenge for smaller owners, they will need to find solutions to survive. Looking on the bright side, smaller owners have the potential to move faster if they have a good plan for their fleet. Taking an innovative approach to raising finance is key – if traditional finance relationships are not available, then they can think of alternative financing structures such as the growing number of specialist funders seeking to fund retrofit technologies.

Regardless, environmental performance is an increasing focus in all financing discussions. Whilst the ship owner may not be issuing bonds, the bank providing a loan may well have obtained its funding linked to environmental performance and in any event a threat to the earning capacity of a vessel is also a threat to the value of the funder’s security.

Many shipowners have reflected that they are being asked by their funders for more data linked to their environmental performance when seeking finance. Being able to provide accurate environmental data isn’t just important in providing ongoing information to funders, it’s essential in assessing what is deliverable when committing to a program of ongoing improvement at the commencement of a new funding facility. 

Collaboration in practice

Ways of collaborating will need to evolve. Several ship owners have expressed frustration about how some government funding for clean technology projects fails to connect with the operating environment that it is seeking to improve. Whilst there is no reluctance to involve academia in these projects the survey highlighted a strong desire to see grant funding more closely linked to the end user and its operating environment than to desk-based studies.

Collaboration can be forced by government grants which require a consortium bid, but this often makes participation difficult for smaller companies which don’t have the internal resource or external network to build bid consortia. The time taken in the administration of these processes can also significantly add to the timeline for delivering on targets, and in some cases the objective of the ship owner needs to be compromised to meet the terms of the funding.

Ready for change

The need to find a better and more innovative way of collaborating was the strongest theme in our recent green financing and broader decarbonisation discussions. Without this, ship owners see problems with technology providers, yards, financiers and R&D projects holding back their sustainability goals. They can’t be expected to simply drop their competitive aims or to sort the challenges out on an ad hoc basis.

Greater collaboration is the answer, and ship owners are ready. Every senior industry player interviewed confirmed that there is a willingness to collaborate on projects that will accelerate the uptake of new technology. They understand that it is critical to achieving the rapid, fundamental change that is increasingly expected from charterers, financiers, consumers, and internal stakeholders who all want to deliver on their own goals and promises. What is needed is more independent conveners for clean technology projects and perhaps this is something that the financial community can play a bigger part in.

We recognise that in many cases the decarbonisation challenge is about revolution, rather than the slow evolution that shipping has been used to in the past. The existing fleet is worth about $1.8 trillion and directly or indirectly, much of that sits on the balance sheets of financial institutions. This provides the incentive needed to bring the financial community and ship owners together, to align goals and work on the evolution of their industries together.

With that evolution and revolution on-going, green financing remains a vital topic of conversation. Read the aforementioned survey of shipowners’ perspectives here