The concerns over the impact of the shipping industry on the environment have intensified the last few years with a number of initiatives being undertaken by various stakeholders. Shipping companies have to consider the impact of environmental, social and governance factors into their strategy, among other challenging factors, if they seek access to shipping capital. On June 18, 2019, 11 major shipping banks launched the Poseidon Principles which will enable banks to support the shipping industry’s reduction of carbon emissions by 50% by 2050. The Poseidon Principles establish a global framework for assessing and disclosing whether banks’ lending portfolios are consistent with adopted climate goals. The objective is all financing sought by ship-owners to be directed to environmentally friendly ships.
The Principles were developed by the banks in collaboration with the Global Maritime Forum, Rocky Mountain Institute, University College London Energy Institute, Lloyd’s Register and other leading shipping players such as ship-owners, brokers and solicitors. The banks that have signed the agreement are Citi, DNB, Danish Ship Finance, Danske Bank, ING, Société Générale, DVB Bank, Nordea, Crédit Agricole, Amsterdam Trade Bank and ABN AMRO. Additional banks and other financial intermediaries are expected to join the association in the future.
But how will the signatories determine whether their portfolios align with IMO’s decarbonisation targets? Since 2019, IMO requires all vessels over 5,000 gross tonnage to collect and report to their flag states the amount of fuel consumption per type of fuel, distance travelled, hours underway, period of calendar year for which the data is submitted (2019 is the first period of reporting) and other various technical characteristics. Flag states will then issue a Statement of Compliance and also share this information with IMO’s Ship Fuel Oil Consumption Database. IMO based on the data submitted, will prepare an annual report to present the progress towards shipping industry’s decarbonisation.
These same data submitted to the flag states will be used by the signatories to estimate each vessel’s carbon intensity in their portfolio and then determine their portfolio’s overall alignment with IMO’s decarbonisation trajectories for each given year. In short the signatories will voluntarily report whether their shipping portfolio meets IMO’s targets for each year. One important point to note is that the data reported by both IMO and Poseidon Principles will be confidential and will not be traced back to specific vessels.
The adoption of the Poseidon Principles by any financial institution will affect both the institution and its customers. New covenants will be introduced in the loan agreements which will require that the ship-owners provide the appropriate data (the same data as the ones submitted to the Flag States) in order for the banks to prepare and report the overall climate alignment of their shipping portfolios. A potential issue is that the banks will require that these data are independently verified before submitted to them and this may create additional administrative and financial costs for the ship-owners. Ship-owners should not find difficult to submit the required data given that their internal systems already collect this information in order to report them the Flag States.
Owners whose vessels do not comply with IMO’s greenhouse emission targets may find that the pool of available financing is reduced significantly. Currently the 11 banks that have adopted the Poseidon Principles only represent 20% of the total global shipping portfolio but more banks are expected to join forces and adopt them as well. There may be cases of financial institutions to be reluctant to join this initiative as they may find it very profitable to lend money to owners whose vessels do not comply with IMO’s greenhouse emissions targets. The owners of non-aligned vessels will see the cost of borrowing to significantly increase as an environmental premium will be sought. The objective is that, in the coming years, vessels are greener and shipping carbon footprint is zero. The owners who will manage to run vessels on alternative fuel sources will have access to a greater pool of funds (“green funds”) and potentially achieve a more favourable borrowing rate.