A small but growing list of shipowners and operators are turning to sustainability-linked financing in a bid to carve out a top tier in a lending world, in which ESG metrics are expected to become de rigueur.

The draw of these loans and bonds for the borrowers on the vanguard is to be able to telegraph commitment to improvement on key ESG metrics, particularly carbon emissions, by agreeing with banks to incentives.

For Odfjell, the Oslo-listed chemical tanker owner that sold shipping’s first sustainability-linked bond last year in a “substantially-oversubscribed” offering, the exercise was a way to show commitment to decarbonisation targets. That included verification by a classification society.

Those targets go beyond “business as usual”, as verified by class society DNV.

Odfjell chief sustainability officer Oistein Jensen said he sees sustainability-linked bonds as a transitional product, ahead of a time when all financing will have sustainability targets or covenants.

“I think that the difference between a high performer and not so high performers will continue to increase going forward. And our perspective is that we wanted to be on the high performer side,” he said.

Ardmore Shipping, the New York-listed product tanker owner, extended a sustainability-linked finance facility with Dutch lender ABN Amro until June 2023 in September that it first agreed in July 2020.

Chief financial officer Paul Tivnan said the Poseidon Principles, a 27-bank framework for integrating climate considerations into ship finance decisions, has provided an anchor point for setting emissions targets in sustainability-linked loans, as well as European Union guidelines for sustainable financing.

Stepping stone

The incentives and penalties are not “make or break”, he said, but he also sees sustainability-linked loans as a stepping stone.

“At some point, it won’t be called sustainability financing. It will just be called financing, because in order to even attract financing … you have to do it,” he said.

Diana Syziu says sustainability-linked finance provides lenders with stability. Photo: Hill Dickinson

For the lenders, the attractiveness of sustainability-linked finance is the measurability of the targets, which provides stability, said Diana Syziu, a lawyer at Hill Dickinson who focuses on corporate and ship finance.

What is sustainability-liked financing?

Sustainability-linked financing involves loans, bonds or other financial instruments in which the borrower receives a reduced margin for reaching ESG-related performance targets agreed in the loan.

They differ from green loans, which are used to finance a specific green project that has an environmental benefit.

Source: Watson Farley & Williams

She said lenders are looking to gradual improvements, such as engine technology, and more openness in reporting and monitoring.

“No one is asking the borrowers, from the market information we’re receiving, to replenish the fleet overnight. That’s not sustainable for the borrower, and it’s not sustainable for the banks either,” the lawyer told TradeWinds.

George Macheras, the global maritime sector co-head at law firm Watson Farley & Williams, said he expects sustainability-linked lending to become increasingly relevant for listed companies.

“It’s a perfect way for them to attract ESG-conscious investors … And it’s a way for them to achieve better pricing,” he said.