Cancel culture or engage-to-change on climate
In the ever-evolving landscape of ship financing, the maritime industry has witnessed significant transformations over the past decade, particularly in relation to sustainability and environmentally conscious projects. This shift has been notably driven by the Poseidon Principles banks, the coalition of financial institutions that collectively manage a substantial 70% of the world’s shipping loans.
As the industry adapts to greener practices, oceanis – a financing platform for asset backed shipping investments – noted that two distinct schools of thought have emerged: the ‘cancel culture’ group and the ‘engage-to-change’ group.
The Poseidon Principles banks, pioneers in green financing, have committed to measuring and reducing the greenhouse gas emissions of their financed vessels. In response to the recent MEPC conference’s approval of an expedited net-zero policy, these banks are now targeting a 70% reduction in emissions by 2040 and complete carbon neutrality by 2050. For ship owners, this implies a substantial challenge, such as reducing daily heavy fuel oil consumption for nearly three decades to meet the stringent emission targets.
Simultaneously, many other banks and funds are distancing themselves from ‘brown’ assets and trades. Some refuse to finance vessels transporting crude oil, while others extend their exclusion to carriers of any fossil fuels, including coal-carrying vessels like Kamsarmaxes and large bulk carriers. This trend is likely to escalate, with rumours heard by oceanis suggesting an additional $20 billion in loans adopting similar policies by 2024.
Divergence in philosophies
oceanis noted in its The State of Ship Finance, Q4 2023 report that a ‘cancel culture’ group opts for a straightforward approach, automatically excluding less environmentally friendly vessels from their portfolios. “This is a valid perspective on the single portfolio level but fails on a global perspective,” said oceanis. “When one bank declines the refinancing of a project, another less stringent source of debt will almost always substitute for that bank. Besides this, while banks have some influence on investment decisions it is always equity’s final choice.
The ‘engage-to-change’ group takes a more collaborative approach, working with ship owners to incentivise and accelerate the ‘greening’ process. They may offer emission-linked loan margins or retrofit financing, imposing higher costs on ship owners even with strong credit profiles. “These funds can be good alternatives – higher leverage, looser covenants and longer tenors are common,” oceanis said. “Pricing has also reduced recently with the average margin now slightly below 5.0%. However, this is still higher than the average for banks of 2.9%.”
Additionally, the definition of a ‘green’ ship varies among lenders, with some focusing on a vessel’s own emissions, while others consider the nature of its cargo or industry. This leads to debates on whether certain vessel types, even if powered by green energy sources, can be considered truly ‘green’. “Is a Newcastlemax or VLCC really ‘green’ even if it is ammonia-powered? Are wood pellet carriers the greenest vessels afloat? Taking it to the absurd, could a wind turbine installation vessel burn coal and still be seen as ESG friendly?” asked oceanis. “This last point is a real paradox in ‘green shipping thought’. Is the vessel carrying oil or oil products responsible for those cargoes being burned? And are there other effects at play?”
Scope-based emission accounting
Regulators have introduced three ‘scopes’ to allocate emissions responsibility within the shipping industry. Scope 1 covers direct emissions from burning fuel, Scope 2 includes emissions from external sources powering the ship or company, and Scope 3 encompasses all indirect emissions related to the value chain. With new EU reporting rules, shipping banks, including Poseidon Principles banks, will be compelled to calculate and disclose emissions based on these scopes, marking a significant step toward transparency and accountability.
Their calculated emissions are based on economic exposure – a loan of 50% of the vessel’s value means that the bank is responsible for 50% of the emissions. According to these scopes, the ship is only responsible for the oil it burns and not for its cargo. For this reason, oil-carrying ships will remain well financed for the time being,” said oceanis.
In the offshore sector, a clear divide exists between vessels servicing oil and gas and those dedicated to renewables. Owners of renewable vessels actively promote their green credentials to secure favourable financing terms, tapping into funds from banks that exited offshore financing after the last bear market. Conversely, oil and gas vessel owners highlight versatility and high specifications to attract financing, emphasising the different risk profiles between the two sectors.
While Poseidon Principles banks remain competitive in pricing due to their size and scale, smaller commercial banks are narrowing the gap. Commercial banks, less sensitive to environmental concerns, provide refuge for ship owners with a less pronounced green agenda. The ongoing availability of cheap funding for ship owners is maintained, with the second-hand market still supported by smaller financiers. Ship owners must weigh the benefits of Poseidon Principles margins against alternative financing options, considering the reduced interest costs versus potential earnings.
“Due to today’s high base rates, a 50 basis point difference in margin from 2% to 2.5% represents only 9% of the total interest costs. Will the reduced interest costs outweigh the earnings that could have been made? We leave it up to you to decide,” concluded oceanis.
Source: The Baltic Exchange
