The Impact of Decarbonization on Shipping Finance
“Many global financial institutions have committed to bringing their portfolios in line with the transition to a low-carbon economy. To fully achieve this, they must address the climate risks to hundreds of billions of dollars in shipping investments that will emerge as soon as 2023.” - Maurice Meehan, Director of Global Shipping Operation, Carbon War Room
At a Global Maritime Forum roundtable in London yesterday, the Carbon Pricing Leadership Coalition and global NGO Carbon War Room, worked with shipping leads from major global financial institutions to explore the challenges of decarbonisation for ship financing.
With the launch of the report Preparing shipping banks for climate change: How can internal carbon pricing help ship-financing banks in risk management?, the two organizations called for shipping’s financial institutions to begin analyzing and managing the risks created by the shipping industry’s imminent decarbonization. In order to do so, they suggest that the industry unites around a global standard for maritime-specific climate risk assessments.
The report outlines the drivers of decarbonization of shipping markets. The drivers include the International Maritime Organization’s (IMO) plans to adopt regulations for reducing emissions from shipping and the possibility of shipping being brought into the EU’s Emissions Trading Scheme (ETS), both from 2023, and science-based targets initiatives that could also apply pressure from outside the maritime sector to reduce emissions. The report also outlines the role that the Paris Agreement could play in depressing demand for the transport of key commodities like petroleum products and coal.
Moreover, the report suggests that the shipping industry begin to consider methods, such as internal carbon pricing or other shipping industry-appropriate tools, to analyse the potential climate-exposed finance that is part of the existing $355.25 billion global loan book as well as new investments. The report concludes that to overcome key barriers to achieving this, it is in the interest of financiers to move together in creating a global standard for maritime-specific climate risk assessments.
Internal carbon pricing, which is already used by 32 percent of companies, according to an October 2017 report by CDP, means that the future potential costs of investments are factored into the bottom-line as dollars per ton of CO2. This enables decision-makers to clearly see when a carbon-intensive investment offers more risk than reward as the world works to keep global temperatures well below a 2-degrees Celsius increase.
The roundtable was part of the Task Force on Decarbonizing Shipping, an industry-led initiative working to develop tangible decarbonisation pathways for the industry. A finance working group aims to deliver principles for integration of climate risk into lending decisions as well as to foster the development of best practices and tools to support their uptake. The Task Force on Decarbonizing Shipping is a collaboration between the Global Maritime Forum, Carbon War Room, the Carbon Pricing Leadership Coalition (CPLC), and University College London (UCL).
Angela Churie Kallhauge, lead, Carbon Pricing Leadership Coalition (CPLC), said, "As nations implement the Paris Agreement, the financial sector is also working to understand and manage the risks and opportunities created by this fundamental shift in the global economy. The CPLC, a global convener of governments, businesses and civil society around carbon pricing, works with partners to share experiences, methodologies and challenges as different sectors begin to incorporate climate risk and opportunity into their business plans. In the shipping industry, financiers will play a key role in ensuring the successful decarbonization of the sector.”
James Mitchell, finance lead, Carbon War Room’s Shipping Program, said, “Ships are carbon-intensive assets designed with a life span of up to 30 years. A newbuild financed today will likely need to operate under a carbon price before its first five-year drydock, when modifications can be made. Yet today most lenders are making decisions without even factoring energy efficiency into lending decisions. By the end of its life span in 2050, that vessel could need to operate close to 90 percent more efficiently than when it was first delivered. We are working to ensure that the expertise of ship financiers is fully leveraged to enable and even accelerate the profitable decarbonization of the shipping industry."
This report is the latest step in Carbon War Room’s work with key partners to ensure that the industry’s financiers support a successful decarbonisation of the shipping industry. The report builds on the February 2017 research paper by UMAS and Carbon War Room “Navigating Decarbonization: An approach to evaluate shipping’s risks and opportunities associated with climate change mitigation policy,” which established that climate policies will impact shipping markets and require actions by financiers and shipowners.
