A sea change is coming

Comment & Analysis

sustainability

Haris Zografakis highlights the initiatives the shipping industry is taking to reduce its greenhouse gas emissions and the implications this has for trade finance

The vast majority of world trade involves goods carried by sea. According to the United Nations Conference on Trade and Development, around 80% of global trade by volume and around 70% by value is handled by ports globally. If the UN’s Sustainable Development Goals are to be met, the maritime industry has to decarbonise. That will mean new standards not just for the ships themselves, and for their financiers and charterers, but also for trade banks.

Last year was significant for maritime decarbonisation for two reasons. First, the International Maritime Organisation (IMO) published its Fourth Greenhouse Gas Study. Second, it passed draft regulation to cut the greenhouse gas emissions of cargo ships, which will come into effect from 2023. There were also two developments on the NGO front. The Global Maritime Forum, the most active NGO in maritime sustainability, published the first set of figures on the application of the Poseidon Principles and it launched the Sea Cargo Charter.

Why does that matter and is it enough?

Haris Zografakis

Haris Zografakis is partner and head of the commodities group at London law firm Stephenson Harwood LLP. He also leads the firm’s partnership with the Global Maritime Forum

In 2018, the IMO adopted the target of reducing the total greenhouse gas emissions from ships by at least 50% by 2050, measured against a 2008 baseline. It also set an interim target of a 40% reduction by 2030. To stay on the right side of those lines, the maritime industry needs technological innovation, greater operational efficiency and new fuels. The challenge is considerable and, given that several major economies have set 2050 as the target year for net-zero carbon, the maritime industry will probably be required to make more progress, more quickly, than it currently plans.

The Fourth Greenhouse Gas Study shows that total maritime greenhouse gas emissions are increasing. But when emissions are measured against transport work (ie in carbon intensity terms), there has been some improvement. That said, the periods analysed included depressed market conditions in which vessels reduced speed, decreasing their fuel consumption and their emissions. These improvements, therefore, may prove temporary as the world’s economy recovers from the pandemic. Maritime emissions may not yet have peaked.

The IMO’s regulatory regime deals both with new vessels, through ship design requirements, and with the existing fleet through operational requirements. In November 2020, it issued new guidelines on energy efficiency and carbon intensity indicators. These are to be implemented from 2023 onwards and all ships will be rated on their energy efficiency in a colour-coded scheme not dissimilar to that found on electrical appliances. Details have yet to be decided by the IMO, but the framework is now clear: vessels operating inefficiently will be at a disadvantage and may have the length of their useful life curtailed.

The maritime industry will probably be required to make more progress, more quickly, than it currently plans

New data, new standards

International regulation is not the only driver of change. Last year saw the first implementation of the Poseidon Principles. They are a voluntary framework under which banks active in ship finance monitor the greenhouse gas efficiency of their portfolio of ships. The analysis of the data from the first year suggests that a large part of the fleet covered will not meet the decarbonisation trajectory needed. That supports those who were concerned by the findings of the IMO’s Greenhouse Gas Study.

Last year also saw the launch of the Sea Cargo Charter. That is an initiative similar to the Poseidon Principles, ie a system for monitoring the greenhouse gas emissions of ships. The target entities are not banks but the users of bulk cargo ships – the charterers. The Poseidon Principles measure a vessel’s emissions by reference to its deadweight capacity. The Sea Cargo Charter looks at the vessel’s ‘transport work’, ie cargo carried per mile. In that sense, the Sea Cargo Charter measures operational efficiency and is closely aligned to the IMO’s approach.

Although last year’s data shows that the maritime industry is still falling short on decarbonisation, the initiatives launched in 2020 suggest that this should soon change. And it will change because data can help show the carbon intensity across the whole value chain in global shipping. That will include the work of trade banks. That means it is only a matter of time, as I argued here in March 2020, until trade finance banks join the ship finance banks and charterers in reporting the carbon intensity of their credit portfolio.