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.
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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.
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.
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. Source
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