With the creation of the Poseidon Principles, the banking sector is taking the lead on driving decarbonisation and the green revolution in the maritime industry. To discuss and dissect the role of financing in promoting clean shipping, I had a chat with Michael Parker, Chairman of Global Shipping, Logistics and Offshore at Citibank and John Hatley, General Manager, Market Innovation at Wärtsilä.
The shipping industry is going through a massive transformation that requires a fair share of investment.
Is it right to say that the banking sector is front and centre when it comes to enabling this green transition?
Parker: Well, I think in the context of shipping, I would have to say yes. When we launched the Poseidon Principles in June 2019, this was the first framework for assessing climate impact from an industry, measuring it, and committing to a target on banks’ portfolios. The reason why the banks were able to do this for shipping is that banks are the primary capital providers for shipping, and that therefore gives us a vested interest and the influence with our clients to try and help them manage the transition to the zero emissions goals set by the IMO.
Hatley: These two industry powerhouses (shipping and banking) have landed a tremendous surge in influence and helping shape a cleaner planet, which we all need to leave for future generations. It’s tremendous change for the good that we see the banks taking the lead with the Poseidon Principles. “Green chases green” is my favourite expression – the money helps shape a clean, green environment.
As this green revolution takes hold, are banks now refusing to renew the loans of companies that do not meet the decarbonisation and ESG criteria?
Parker: I don’t think there’s a simple answer to that. I think that banks, through the Poseidon Principles and other things have really put environmental factors at the top of the list in banking now along with fundamental risk and credit analysis and all the things banks do to make good business decisions. For the first time, environmental impact is up there as a feature that gives the lender or lenders the ability to choose what business to do.
I think the general impetus of regulators around the world, from central banks all the way through to banking regulators, means that everyone in finance is attuned to this.
Now, to really try and answer your question, a situation where a borrower doesn’t meet its own stated policies on ESG, then, of course, that might be a reason for a bank to say, Well, you know, it’s all talk and no action. However, a very key point when we started the Poseidon Principles discussion is that banks are looking at this at a portfolio level. We’re not looking at on an individual vessel-by-vessel basis. We’re looking at the portfolio giving each bank the ability to make the business decisions it wishes to make and to further the relationships it has with its clients.
This is about cooperation with ship owners, and ship owners have responded very positively to looking at the data and realising what they have to do.
Do companies still feel like have to choose between going green and making a profit, or is that mentality changing now?
Parker: I think what we’re seeing is that things like greenwashing are going to disappear very quickly, because whether it’s regulators or investors, people want to see the truth and the truth is really in the emissions data. And that data is becoming increasingly available. That’s what’s being used in the finance world to measure key performance indicators on green bonds in the bond market, transition bonds in industries like shipping. It will be that data and the improvement in the data showing the improvement in the carbon intensity that will actually show how shipping is lowering its emissions en route to its ultimate zero emission goal. We haven’t had the data before, and I think this is going to be a game changer in many respects. No longer will price be the main decision-making tool for the charterer because emissions will become more important. And I think that will dictate commercial success.
How have maritime players received these Poseidon Principles?
Hatley: We’re seeing a number of the Poseidon Principle banks being introduced to owners who have a desire to do better, who care about cleaning up their fleet and maintaining a more competitive, greener image.
A number of the owners look at a ship holistically, not as a single product of enhancements to the existing fleet. If we can’t do better with the existing fleet, how would we have sufficient money to earn the capital and justify the risks and build newer, more sophisticated, better running ships in the future?
So, we’ve got to do better with the existing fleet, and we’ve been introduced to several owners where they look at the ship and we look across a broad span of possibilities for that type of ship and its trade to improve.
How do you see the consumer perspective playing out? Will consumers have a choice between taking the green option or the cheaper option? Will the environmental option always be the more expensive one?
Parker: Consumers will have a choice, as will manufacturers. It’s quite possible that as all this emissions data becomes available, manufacturers will realise that they have to change their supply chain, then they have to move manufacturing closer to point of sale. I think it’s quite likely there will be some impact there.
Hatley: To amplify this, I was talking to some ship owners in a containerised business and they told me that 10 years ago, all they talked to a customer about was the price to move a TEU across the Atlantic or across the Pacific. Now they say, ‘if I don’t come in with a very strong decarbonisation and ESG policy, I can’t talk to them.’ Before 10 years ago, it wasn’t on the agenda. Now it is the key agenda at Walmart, IKEA, Nike, Amazon, and these are the ones that face the customer with the end-product for retail. Now this is transcending from the brand to the customer to the client, where we see the part of the industry in the background facing intense pressure to also clean up.
It seems that banks really have a massive role to play in decarbonisation. How willing is the industry to take that role?
Parker: I think it is very responsive. Shipping finance will become more of a utility in the future as the financing for these new vessels and new fuels and the infrastructure that goes with them. For it to be longer term, there has to be a higher degree of certainty and the ability to repay the loan to give a return on equity. But obviously, in the early days, it has to be through some form of subsidy through either market-based measures, or even directly locally.
I think banks will continue to be important, I think we will continue to expand the Poseidon Principles signatories. But you know, who knows where we’ll be in five years. And if we’ve helped kick something off that evolved quickly into something that helps other industries and helps the shipping industry, it would have been great.
I wanted to briefly touch upon the subject of clean future fuels. There’s scarcity around them and a lot of demand from all industries.
So, with this situation of very high demand, low availability and prohibitive pricing today, how soon can we expect them to enter the market?
Hatley: Certainty breeds investment and uncertainty curtails investment. Today we see uncertainty at many levels. Before, it might be decades before something changed. Now, it’s every few years on a ship that might have a life of 15, 20, or hopefully 25 years.
We can talk about the fuels, the densities, and all the other technical aspects about them, the logistics, and are they available at what price, but what it all comes down to is that today, we’re witnessing real asset options as value. And times of high uncertainty are when the real asset options have their greatest value. So, there is some pause, and rightfully so as these things began to sort out. There’s a lot of uncertainty and we’ve got to see some additional certainty for capital to flow where it needs to be prudently invested.
Parker: One of the good things for shipping is that there seems to be a lot of alternatives, and what is important is that the shipping industry has to play a large part in the development of these fuels. It’s important that the industry is influencing the IMO’s decisions on what is available, not waiting for those decisions to be made and living with it. We don’t know which will be the successful fuels, but we need to get the investment in with support from governments. And then what will follow will be the investment in technology, and research and pilots.
Source: Wärtsilä