It’s hard to avoid the ESG agenda right now. Environmental, social and governance issues have become a lightning rod that seems to focus all critical attention, to the exclusion of all others.
Profitability? Dividends? Positive cash flows? Without those you may be struggling, but at least you will still be in business, even if only just.
But no ESG reporting? Then get to the back of the queue if you need more finance or investor support.
Joachim Nahem, founder of ESG advisor The Governance Group, put it well at last month’s TradeWinds digital Posidonia forum.
He said the game-changing element of the shift from corporate social responsibility (CSR) to ESG had been that the latter now has financial consequences.
“You could argue before that CSR was more about reputation, altruism, doing good,” Nahem said. “Now it has a bottom line. Access to capital depends on performance and transparency.”
It should not be a surprise that shipping has come late to the party.
The ESG agenda has become central to the strategy of most financiers and fund managers over the past three years.
Speaking at the same event, Paul Taylor, global head of shipping and offshore at French bank Societe Generale, stressed the issue was now ingrained in the culture of financial markets. It is no passing fad.
“It’s definitely not hype,” he said. “Anyone who decides it’s not their problem is going to have a very short future in the industry.”
Taylor was instrumental in drawing up the Poseidon Principles, the benchmarking framework that enables lenders to align their shipping loan portfolio with the necessary reductions in emissions laid out by the International Maritime Organization.
Positive reaction
Reaction from owners and operators to the Poseidon Principles had been “very, very positive”, Taylor said.
“So far, I haven’t had any form of pushback from owners in terms of what we’re trying to do and the role of banks,” he added. “This is now an unstoppable force.”
Yet implementation of ESG policies remains erratic across the industry, with wide variations not only between large and small companies — which might be expected at this stage — but also between outfits listed on the same national stock exchanges.
Such discrepancies were exposed in a deep dive analysis published recently by analysts Anders Redigh Karlsen and Hakon Hjelstuen at Danske Bank.
[ESG] is definitely not hype. Anyone who decides it’s not their problem is going to have a very short future in the industry ... This is now an unstoppable force
Paul Taylor, societe generale:
They looked closely at the 14 Nordic shipowners they cover, in effect an A-to-Z — or at least an A-to-W — of the region’s top companies from Avance Gas to Wallenius Wilhelmsen.
Greenhouse gas emissions, and how to cut them, is by far the highest-profile ESG issue faced by shipping companies at present, although governance and social standards remain significant.
By looking at two years of emissions from ship movements to and from European ports, along with other indicators, Karlsen and Hjelstuen found a clear hierarchy of how ready companies are for future commercial demands.
They concluded that chemical carrier owner Stolt-Nielsen faces the greatest challenge cutting future emissions, LNG carrier owner Flex LNG is best positioned, while Hafnia, BW LPG and Belships are poised to be the relative winners in their segments.
Accurate assessment of the relative performance of each company was not helped by a wide difference in the quality of ESG reporting standards. Others have estimated there are up to 200 different standards in use, with some companies inevitably choosing to game the system by picking the most favourable metric for them.
Tellingly, Karlsen and Hjelstuen said they saw no impact on share prices from relative ESG performance yet. But they did conclude that those companies that have more modern fleets and are already engaged in cutting emissions today will be best placed to succeed in the future.
The key reason for that is the lack of certainty about which fuel to choose and what ships to build.
With a modern fleet, that decision can be delayed until technology development and prices have settled. Those with older fleets that need to be replaced sooner may be forced to pay top prices for designs that are later found to be inadequate.
Meanwhile, regulators, investors and customers will be expecting the better performance that more modern vessels provide today.
Ultimately, it is not good enough just to talk about ESG. Shipowners and operators are now being expected to deliver.
