A liquidity gap for smaller shipowners to finance the transition to zero-carbon fuels is growing while tried-and-tested alternative technologies remain unavailable, bankers have warned.

Paul Taylor, managing director and global head of shipping and offshore for bank Societe Generale, said the banks’ initiative alongside regulation will lead to behavioural change.

“It will channel liquidity and capital to those shipowners who have high standards of maritime stewardship and want to align with industry goals,” said Taylor, who is a leading light in the development of the Poseidon Principles for green shipping lending.

“Therefore, it will take capital away from those owners who have not got ESG [environment, social and governance] policies.”

Draft concerns

But he added there is a risk of a lack of investment for shipping developing due to recent European moves to funnel financing toward green projects.

“I am concerned about the way the EU Taxonomy and Climate Bond are drafted,” Taylor said, referring to Brussels legislation that impacts green finance.

“Both are fantastic initiatives with the right ambitions and objectives, but the way this is drafted is going to close the door on what we have today in shipping and the transition because they are focused on the destination of zero carbon and not on the journey we have to undertake.”

Ship financing capacity available from the top 20 banks in the sector has shrunk by about $120bn to $250bn over the decade to 2020 as European lenders have dropped out of the market or stepped back, said Abhishek Pandey, managing director and global head shipping finance at Standard Chartered.

The gap has not been filled by Asian leasing finance which lifted to $60bn by 2019, he said, and small to medium-size owners are being priced out by creditors preferring to lend to lower-risk big or high-quality operators.

“The liquidity needed is lesser than that available today, but it is available at a price,” Pandey added in a webinar on financing the fourth propulsion revolution hosted by the International Chamber of Shipping.

Svein Steimler, president and chief executive of NYK Line's NYK Group Europe, said large groups would be able to finance the move to alternative fuels, but it was important to “acknowledge the fact that the majority of shipowners around the world have not got the backbone to look into technical development”.

However, Steimler did not think there will be a problem with investing in ships that become obsolete before the end of their natural lifetimes.

“I don’t believe for a minute there will be stranded assets,” he said.

Rules for different types of ships will vary as technologies develop over the period to 2050 giving time for most to live out their lives.

But Steimler added: “You cannot spend millions of dollars to convert older vessels. That will not happen.”

Abhishek Pandey is managing director and global head shipping finance at Standard Chartered. Photo: Marine Money

Pandey said there will be a liquidity gap, but financing will trickle down in time — although it may not be from traditional sources and may first be directed at infrastructure rather than vessels.

Unexpected uptake

Beatrice Russ, partner, maritime, aviation and travel at law firm Ince said some uptake was coming from unexpected sources such as charterers.

“Large public companies are at the forefront, but I wouldn’t say small and medium-size owners are not interested,” she said. “They are not stupid; they know it is coming. They are looking at it but prefer to take a wait-and-see attitude at the moment because they can’t afford it.”

Taylor added that the first year’s audited results for the Poseidon group, which now has 27 members, showed most of the financial institutions were “slightly misaligned” with initial targets and the second set in December could be unpredictable due to effects of the Covid-19 pandemic.

“We are not expecting the impact of the Poseidon Principles to be overnight. It is going to be over a period of years,” he said. “But we are bringing climate risk into our credit process and that is a one-way momentum.”

Recent criticism of the Poseidon Principles was good, Taylor added.

“When we launched two years ago people were saying, ‘This is unrealistic. It’s too ambitious.’ Now we’re having the opposite thrown at us that we haven’t gone far enough,” he said.