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Sustainable finance tightening will cut off ship funding for smaller companies

Environmental, social and governance standards set to restrict lending to shipping’s squeezed middle, according to leading finance experts

Capital will only flow in the direction of companies that are doing the right things. Scale and access to capital markets go hand in hand, according to funds, while banks are establishing principles for the inclusion of climate alignment and climate risk considerations in lending decisions

RAPIDLY tightening restrictions from capital market lenders and banks linked to environmental, social and governance (ESG) targets will further squeeze available financing for smaller shipping companies and trigger another round of consolidation within the next two years, according to senior finance industry experts.

While many of the remaining bank lenders to shipping and capital market providers have long held so-called ESG targets linked to projects, a combination of regulatory pressure from governments keen to accelerate climate change policy and ratings agencies factoring in sustainability risk on rated debt has intensified pressure on lenders to tighten standards on lending.

Meanwhile, institutional investors, particularly pension funds, are increasingly restricting their focus to investments with verifiable ESG standards.

“ESG is a term the shipping industry has to contend with because capital is only going to flow in the direction of companies that are doing the right thing,” said Andrian Dacy, managing director of JP Morgan Asset Management’s Global Transportation Group.

“There has been a lot of lip service paid to this in the past, but the intensity of this trend has increased significantly to the point that it is now something we talk about this every day internally,” he told Lloyd’s List.

“The major pension funds will not invest in companies that do not have positive ESG outcomes, and you can expect to see similar initiative from the banking sector shortly when it comes to shipping,” he said. "Mark my words within two years this will affect everyone – we need to really wake up and see what’s coming. "

Following initial discussions last year during a Global Maritime Forum meeting in Hong Kong, Lloyd’s List understands that several major banks are now close to launching a set of principles for the inclusion of climate alignment and climate risk considerations in lending decisions.

While the enhanced focus on ESG means there is an increased demand for start-up projects that meet the right criteria and large companies able to hit the required governance standards, smaller private companies with limited resource to adapt face being shut out of funding. 

“Ultimately this means we will see bigger companies,” said Mr Dacy. “Many of the more traditional, family-owned companies do a good job, but if they do not have the money it does not matter how good you are — you are going out of business.”

According to Kristin Holth, global head of ocean industries at DNB, consolidation is already happening. 

“You need a certain size to compete,” she told Lloyd’s List. “With the changing requirements, size will matter much more and not just in terms of fleet size — this is about how you consolidate and make joint ventures across the value chain or create more integrated companies that are able to use more than one capital source and utilise the breadth of the capital markets to become more competitive”.

While Ms Holth takes a softer tone on the prospect of companies unable to prove ESG credentials being shut out of there market, she concedes that positive selection of candidate companies will see an end to some relationships.

“ESG and commercial viability goes hand in hand already. Our credit analysis already requires a deep dive into company’s ESG standards and policies and if, over time, those policies are not aligned with what we are looking for then maybe we will have to part company. But it is certainly not a hard stop — this is a dialogue we have with all clients,” said Ms Holth.

While the institutional investors may not favour shipping’s squeezed middle, an increasing number of sustainable finance sources are now becoming available for start-ups with green credentials. And with the International Maritime Organization’s target to at least halve CO2 emissions from shipping by 2050 requiring a rapid influx of funding to back research and development programmes, sustainable financing sources will increasingly be required to back projects.

According to Ms Holth, the enhanced focus on ESG means there is an increased demand for start-up projects that meet the right criteria.

“We’re trying to mix capital with good ideas, so that means we are looking at how we can enable green bonds, green loans and green funding for projects,” Ms Holth told Lloyd’s List.

NYK and MOL both tapped the green bond market last year to fund environmental initiatives, however their initial foray has not been emulated elsewhere and shipping has generally been slow to the market.

“A lot is to do with investors and the credit we’re talking about,” said Ben Powell, deputy head of climate and sustainable finance at SEB explaining the slow uptake. “The green market started as an AAA-rated environment and we have had very few non-rated debt in green format, so it is a bit of a supply-demand problem and I think it is partly due to the fact that it is a very specific investor base. But I do see that changing.”

Ms Holth concurs that it is simply a matter of time and finding the right partners and projects. 

“It’s a matter of time — it’s coming,” she said.

Despite his prediction that many companies will disappear because of the shifting finance focus, Mr Dacy remains confident that the industry should embrace the opportunities presented.

“I think this is an exciting moment. I think for all the reasons mentioned we will see underfunded companies go out of business, but I think you will also see this process bring the best practices together. I think this will lead to a better organised, better funded industry which will be good news for all of us. Will it be difficult — yes, but we should embrace the challenge, look at it as a new era for this industry”.

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