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Leadership Insights Live: Legal, Stakeholder and Commercial Forces of Change round-up

11 March 2021

Shipping must harness change from customers, stakeholders, financial incentives, and national regulatory frameworks to reach its decarbonisation goals, according to speakers at the 10 March Leadership Insights Live.

Guy Platten, Secretary General, ICS, said:

“We know that just to achieve the IMO’s target of a 50% reduction in global GHG emissions from shipping by 2050 all avenues must be explored. If we wait for the enforcement of mandatory global regulations, we will not reach the target.”

Platten stressed the need for stakeholder led initiatives to speed up decarbonisation. He noted the ICS proposal, made with a coalition of partners, to set up a $5 billion Research and Development fund – funded from a mandatory levy of $2 per ton on marine fuel. This is currently being considered by the IMO Marine Environment Protection Committee.

Push for alternative fuels

Shipping is in the early stages of deciding what the most viable low-sulphur and zero emission fuels will be for the industry. However, as Rashpal Singh Bhatti, VP Maritime & Supply Chain Excellence, BHP, said during the discussion there is a need for companies to “take the bull by the horns” and move beyond rhetoric on economics and emissions.

He noted that being an early adopter of a new fuel undoubtedly comes with risk but can bring financial and shareholder value too if well thought through.

Bhatti said:

“It requires analysis, innovation, lateral thought and conviction to take forward and leave options to manage downside risk as much as you can.”

He has learnt through experience: in 2020 BHP awarded the world’s first LNG-fuelled Newcastlemax carrier tender and expects the first vessel to be delivered in less than a year’s time.

Bhatti said that he does not see LNG as a transition fuel but one that will be used as part of a mix of fuels in shipping for many years to come.

However, the Newcastlemax engines are duel fuel and he does not rule out retrofitting the vessels if a zero-emission fuel becomes dominant. “These vessels are very fungible to take us through the next decade,” he explained.

BHP expects to deliver 5 LNG-fuelled Newcastlemax vessels in 2022 and to continue growing the fleet until a “homogenous fuel of choice is known and then will take a heterogenous approach”.

Financial incentives

Valentina Keys, Senior Associate, CMS LLP told the audience that to create impactful progress on decarbonisation clear and consistent policy and targets are needed from governments, with a balance of carrot and stick incentives.

Regarding stick incentives, she noted the “transformational” success of the UK Climate Change Act passed in 2008, which was the first of its kind and legally binding to deliver 80% reduction of green house gas emissions below 1990 levels by 2050. The target has since changed to net zero.

Keys said:

“That affected a lot of positive change in creating fiscal, economic, legal and voluntary drivers that generated a move away from coal towards gas, solar, wind, and renewables. The change in mindset generated change in policy and decisions being made at board levels.”

When it comes to carrot incentives, the world of finance has a role to play. However, green loans are still in their infancy. Christopher Rex, Head, Innovation & Research, Danish Ship Finance, said:

“We are beginning to use performance-based margins as an incentive; this is where a company’s green or improved performance is used to reduce margins if they are performing strongly on emissions.”

However, Rex noted that the “really scalable solutions” remain to be seen and more business model innovation is needed. “The big wins will come when we look at the next generation of green ships,” he added.

Collaborate to decarbonise

Keys stressed that “the only way forward is collaboration” and that a joined up approach for decarbonisation efforts must mean the entire supply chain is working together:

“Are ports talking to stakeholders and ship owners? Are ship owners talking to ship builders, and ports, stakeholders, fuel suppliers, governments and policy makers? Everyone must understand what their obligations are across the entire chain. We must horizon scan and be prepared for change rather than just react.”

Bhatti stressed how critical collaboration has been to push forward with LNG-fuelled vessels and has worked together with class societies, ship yards, charterers, financiers and awarded a tender to Eastern Pacific Shipping.

He said: “The enablement here has been contractual and financing, but most importantly has been about capability and mindset change saying, ‘We think this can happen and know it can happen but can’t do it alone’. We reached out to market to get that shared expertise and value.”

Stranded assets risk

Shipping should heed warnings from the energy sector over the risks of stranded assets, according to speakers. Rex said it was a concern shared by all industry peers:

“There are lessons from the energy sector on power plants being outperformed by green energy sources. In shipping we must be aware that even if ships are young there is a risk of more attractive green assets emerging and replacing them quicker than anticipated.”

The decarbonisation of shipping could shake-up traditional business models and the lifetime of an asset, speakers warned. Bhatti said:

“Any organisation using model of looking at asset over 25 years will have a surprise ahead of them. Many owners have already started to reprice assets looking at much shorter terms. The newbuilds they are thinking about need to be as option friendly as possible and build fungibility in.”

External pressures

While reaching zero emission goals is a social responsibility for shipping, external pressures are speeding up those changes and the industry must be prepared to face them.

Keys noted how shareholders have taken legal action on energy companies that are not fulfilling their climate goals and oil majors are having to” completely rethink” their business models and strategies. “ESG is written all over them with red pen,” she stressed.

“There is pressure from consumers, shareholders and investors that want companies to take climate into account. Shipping is no different, so the risk of exposure is there unless action is taken.”

Companies should not only take responsibility for climate action but responsibility for their activities in developing countries, Keys warned.

She noted how large energy companies are being held to account for the impact they have had in countries like Nigeria and that shipping was not exempt from what is expected to be “a surge in climate change litigation against boards and across developing countries”.