Can shipping capitalise on the green finance surge?
2 September 2022
As banks and regulators around the world tighten requirements for environmental, social and governance (ESG) reporting, companies across multiple industries are having to up their game. At stake are not just customer credentials and environmental targets, but access to sustainability-linked finance, which as of the end of last year represents around 10% of the approximately US$120 trillion global credit market. As the trend for stricter reporting and greater lending associated with ESG spreads, it appears that shipowners are no exception.
There has traditionally been a wide gap between ESG reporting requirements across the world. But there are strong signs that a more harmonised regime is emerging. The latest regulator to encourage stricter standards is the US Securities and Exchange Commission (SEC).
In March, the SEC proposed a rule that would require companies issuing stocks or bonds to make detailed climate-related disclosures in three areas: material climate impacts, greenhouse-gas emissions, and targets or transition plans. Companies will need to describe risks that have an impact on their business, results or financial condition, as well including climate-related metrics in their financial statements.
The SEC move, which could be implemented this year, pushes US reporting standards into line with the standards set in Europe. The EU Directive on Non-Financial Reporting 2014 requires large companies to report on policies, practices and results related to human rights, working conditions, corruption and the environment. Countries including the UK, France and Norway also have specific requirements.
The Basel Accords – a global framework for regulating risk in the banking industry – are another force set to drive higher and more globally harmonised standards in ESG. Basel III was devised after the 2008 financial crash to help banks better manage credit, market and operational risk. In planning the implementation of the new framework, the European Commission and European Banking Association (EBA) have added ESG risk factors into the equation.
The EBA has published draft standards for ESG reporting for banks under Basel III. The standards are built on long-standing initiatives such as the Task Force on Climate-related Financial Disclosures of the Financial Stability Board. But they go further by defining binding templates, tables and instructions to enhance consistency and comparability. As ESG risk to banks include risks to their investments, those receiving funding from European banks can expect greater scrutiny of their own exposures.
While the European regulators have been the first to act on Basel III, other regions will follow. As banks and investors find themselves increasingly regulated for ESG factors, reporting expectations for the companies they invest in will also rise.
Increased pressure on ESG reporting follows a dramatic increase in the value of the sustainable finance market. According to data provider Refinitiv, last year sustainable bond issues passed the US$1 trillion mark – nearly 1.5% of the global bonds market and more than 20 times higher than 2015 figures. Sustainability loans tipped past US$700 billion (compared to a global lending market of US$7 trillion), more than three times the previous annual record.
Recent developments could make 2022 another big year. Notably, Brookfield Asset Management has raised US$15 billion for its Global Transition Fund, which has become the biggest private fund dedicated to the net-zero energy transition. While direct investment in clean energy is a large part of the market, other sectors will benefit from the influx of green finance. In an interview with CNBC earlier this year, Mark Carney, former governor to the Bank of England and now Head of Transition Investing at Brookfield, noted the fund’s role in driving the energy transition across industries.
“We’re focusing just as much on going to where the emissions are,” he said, “getting capital to steelmakers, to auto companies, to people in utilities, people in the energy sector so that they can make the investments to get their emissions down.”
Shipping is conspicuous in its omission from Mark Carney’s list. One reason that investors often shy away from ESG investing in maritime is the slow pace of demonstrable change. With nearly 30 years until its first sector-wide emissions reduction target – and even that distant goal currently aiming to only halve emissions – some analysts suggest that the horizon for making returns on climate-based investments in shipping is currently too remote for most investors.
But while shipping may not have access to the full market of green investment options,climate-based finance is already a reality. In late 2021 accountancy firm Deloitte noted that since May 2018, new funding directed to shipping organisations based on ESG indicators has amounted to approximately US$14.5 billion. That represents around 5% of a total global ship finance portfolio that stood at just over US$290 billion at the end of last year, according to Petrofin Research.
Green finance grows
The impact of the Poseidon Principles, a commitment to invest in assets that comply with shipping’s long-term environmental goals, is set to drive sustainability-linked ship finance further. The 29 signatory banks represent around US$185 billion in investments – well over half of the total global ship finance portfolio. Although many have yet to fulfil the principles across their portfolios, the direction is clear.
Accessing green finance may not be easy for shipowners. According to Deloitte, many are missing out on the ESG reporting disciplines that could improve their prospects for raising finance. A sample of shipping companies revealed that just 63% had produced enough meaningful ESG metrics to be rated by the four main sustainability rating agencies.
The majority of the globally renowned rating agencies have not yet evaluated or published ESG ratings for a significant number of shipping companies, explains Elias Makris, a partner at Deloitte Greece. Without those ratings, investors have less incentive to look at shipping as an addition to their sustainability-linked portfolios.
Makris notes that even where shipping companies have strong ESG practices in place, how they report it matters. “It is quite likely that even if a company is active in ESG, if the policies and frameworks governing its operations are not accessible, the resulting rating will be lower than if this information had been publicly available,” he says.
A report from PWCsums up the increasing onus on shipowners: “Public disclosure of ESG performance will soon be mainstream in the maritime industry. We see shipping companies moving to a more focused mindset of treating ESG data as an asset.”
ESG reporting represents another moving target alongside tightening environmental regulations. For shipowners, keeping up with these increasing standards is no longer just a matter of compliance; it is a critical tool for securing access to capital and safeguarding the future of their business.