Eleven banks have launched a global initiative that aims to incentivise loans to shipowners that want to buy or build vessels with lower carbon emissions, while putting a squeeze on those who do not.
The ground-breaking Poseidon Principles initiative led by Citi, Societe Generale and DNB will bring the leverage of ship finance to the ambitious challenge of cutting greenhouse gas emissions from ships by 50% by 2050.
“This is a very positive thing,” said Paul Taylor, global head of shipping and offshore at Societe Generale. “There will be more liquidity for projects that reduce emissions. The flip side is liquidity may be more limited for others.
“It brings climate change fully into the due diligence for every transaction.”
Maersk, Euronav, Cargill and Lloyd's Register have all given their support to the idea.
“Shipping’s decarbonization will require unparalleled innovation," said Soren Toft, chief operating officer of AP Moller-Maersk. "The Poseidon Principles will help us catalyse this transition."
Signatory banks, which account for around $100bn of the world’s outstanding shipping loan book of over $450bn, will collect carbon emissions figures of ships they finance to then calculate the carbon intensity of their overall portfolio.
To reduce the carbon intensity of their portfolios over time, in line with the IMO’s 2050 target, banks will then have to finance individual ships with a lower carbon footprint than the ones they replace.
“The aim is to partner and support our clients as they adapt to the changes taking place in the market towards 2050,” said Taylor. “This genuinely is something intended to help support our clients. It’s a carrot, not a stick.”
Michael Parker, global industry head of shipping and logistics at Citi and chair of the Poseidon Principles drafting committee, said: “As banks, we recognise that our role in the shipping industry enables us to promote responsible environmental stewardship throughout the global maritime value chain.
“The Poseidon Principles will not only serve our institutions to improve decision making at a strategic level but will also shape a better future for the shipping industry and our society.”
The initiative is innovative not only for shipping but also for the finance market, said James Mitchell, manager of global climate finance at the Rocky Mountain Institute, a non-governmental group working for a low carbon future.
“This is truly innovative and ground-breaking, and the shipping industry should be proud," he said. "This is the world’s first global agreement to align finance with climate change targets. This is what leadership looks like.”
There will be more liquidity for projects that reduce emissions. The flip side is liquidity may be more limited for others.
Paul Taylor
The project, which has grown out of the Global Maritime Forum initiative, has four principles around the assessment of climate alignment, accountability, enforcement and transparency. A standard covenant clause for loans and lease agreements is available to signatory institutions.
In addition to Citi, Societe Generale and DNB, other banks that have signed on are ABN Amro, Amsterdam Trade Bank, Credit Agricole CIB, Danish Ship Finance, Danske Bank, DVB, ING and Nordea.
More banks are expected to join in the near future, including Asian banks and Chinese lessors which have expressed interest, it is understood.
Kristin Holth, executive vice president and global head of ocean industries at DNB Bank and a member of the drafting committee, said: “This initiative shows how the finance industry can have influence and assist clients to improve their businesses.
“It is a step in the right direction for the industry to map a practical way forward to a lower carbon future.”
IMO member nations are working towards agreement of mandatory carbon reduction regulations by 2023, but as yet there are no firm rules to force shipowners to decarbonise.
Some shipowners such as Maersk have pledged radical cuts, but most of the industry remains uncommitted amid faltering international political momentum on the issue.
However, growing public concern is being felt by mainstream western financial institutions which face increased pressure from their own investors to mitigate climate change risk.
Environmental groups have criticised that shipping is outside the Paris Agreement on climate change, and they may criticise the Poseidon Principles for being limited in ambition when scientific evidence suggests more radical cuts in carbon pollution is needed to mitigate climate change.
Dr Tristan Smith of University College London's energy institute said the shift from fossil fuels exposes banks to new risks.
"If banks discover too late, they have invested in ships that will become undesirable or even obsolete because of this change, they could see valuation write-downs or even defaults in their portfolio," he said in a statement released by the initiative. The principles will help manage that risk, he added.
Holth said: “I think it is the industry’s responsibility to act on the IMO’s lead in reducing carbon emissions. We have a responsibility; we all have a responsibility in this. We must mobilise if we are to support sustainable business in a lower carbon world.”
Taylor added that he believed the initiative would have an important impact on the market over time.
“We are building leadership in shipping for those who want to be at the forefront of the sector,” he said.
“This is responsible banking for responsible shipping. It is about doing good business. We are building leadership in shipping for those who want to be at the forefront of the sector.”
