Major banks that currently hold $400 billion worth of global shipping debt must begin proactively evaluating the risks to shipping investments associated with climate change mitigation policy, according to a new report published by the Carbon War Room and UMAS.
Major banks across the world are having to re-evaluate their investment priorities of late, in anticipation and in line with policies being implemented which are designed to facilitate and speed the transition to a low-carbon economy, and mitigate the impacts of climate change. The new report from Carbon War Room and UMAS outlines the risks to banks which currently hold $400 billion of global shipping debt, and the potential pathways to climate stress-testing shipping assets. Specifically, “This report outlines a possible approach to evaluating shipping’s risks associated with climate change mitigation policy through an illustrative case study of investments in the newbuild drybulk fleet in the size range 60,000-99,999 dwt” (deadweight tonnage) — “drybulk” meaning a bulk carrier from a bulk liquid carrier.
The report, the third installment of research on stranded assets and climate risk in shipping, is the result of 18 months work, and found that while there are some financial stakeholders aware of the risk of stranded assets, there are few banks which actively assess ship efficiency or have lending programs in place to keep their assets competitive.
“This is not an easy time for shipping finance,” said Jules Kortenhorst, CEO, Carbon War Room and Rocky Mountain Institute. “However decarbonisation can still be a win-win on profit and climate for shipping desks, but they will have to be more proactive and live up to the green reputation that many of their institutions hold.
“Financiers should be future-proofing investments and preparing to harness the new opportunities decarbonisation will create. Even with $400 billion in global shipping debt at stake, we have little evidence this is happening. We’ve taken the first step.”
The report is not easily summarized, as it is aimed more towards raising concerns and questions for banks to ask, rather than specifically outlining faults in the shipping industry. The report’s key findings are provided as answers to five key research questions, each of which lays out many of the global policy conclusions we have already seen in various reports over the last few years for the transition to a low-carbon economy. The five preliminary key questions the report poses as a guidepost for the summary of its findings are:
- How might the fuel, machinery, and energy efficiency technology used by ships within the specified fleet change over time, both for newbuilds and existing ships?
- What does this evolving landscape mean for ships built at different points in time? For example, how might a 2020-built vessel operate and compete with more modern ships entering the fleet in 2030?
- How might different investment horizons influence the composition of the fleet and its ability to manage a low carbon transition?
- How might known market barriers and failures in the shipping industry (particularly between the owner and the charterer) influence the above outcomes?
- What do these factors in combination mean for the resilience of assets to risks induced by climate change mitigation regulations and ultimately their profitability as well as the volatility of returns?
The report concludes by instructing banks to “Understand the problem” at hand: “A straightforward first step is therefore to keep abreast of the evolving public and private sector discussions on GHG emissions, and look out for signals that could cause changes in demand for your sector of the shipping market or affect the technology requirements and operation of your ships.” Secondly, the report instructs banks to “Evaluate your ship’s or fleet’s competitiveness under potential future market conditions.” Finally, the authors of the report instruct the banks to “Have an answer for these questions”:
- What would be the most profitable way to modify your ship in the future to lower operational carbon emissions (e.g. as a response to carbon pricing) per t.nm by 20, 40, 60 or even 80%?
- What could you do to your ship now to enable it to accept these future modifications at minimal additional cost?
- Is there a way to justify any of these modifications now, perhaps through innovative solutions such as the use of options or by securing charterer investment through retrofit shared-savings clause?
- How would any future retrofitting be financed?
“Risk is nothing new to the shipping industry or to the major financial institutions that bankroll it, but climate transition risk is,” explained James Mitchell, senior associate for shipping with Carbon War Room. “If a newbuild financing decision is made today, that vessel will very probably have to compete under new IMO or EU policy actions before its first drydock. This work suggests that these risks will impact the market and should be considered now.
“We recognise the challenges faced today. Markets are weak, capital requirements are increasing, and compliance with upcoming regulations will require significant capital investment. However, actions taken now by financiers, owners, and shareholders will position both individual assets and the industry as a whole for greater long-term profitability, and will ensure that the first step of decarbonisation is a success. We look forward to working with the industry’s leaders to understand the risks and unlock the opportunities of decarbonisation.”