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Can banking’s Poseidon adventure rewrite the script for shipping’s decarbonisation disaster?

The Poseidon Principles — a global framework for measuring the climate impact of bank’s shipping portfolios — could be the most significant step yet towards shipping’s ultimate decarbonisation

By incorporating clean shipping criteria into ship finance covenants, banks have produced a tool to demonstrate that shipping’s key stakeholders are acting responsibly, but they come with likely consequences, winners and losers

NOT all of today’s shipowners are going to make it to 2050. The route to shipping’s aspirational decarbonisation deadline is likely to be littered with casualties, and the banks understand that better than anyone.

With around $450bn of senior debts currently sloshing around a market still awash with overcapacity, fuelled by some pretty questionable past lending practices, the banking sector has a vested interest in making sure their clients make the right decisions from here on.

Any banks finding themselves invested in ships that become undesirable or even obsolete amid tightening climate controls will ultimately face valuation write-downs or even defaults in their portfolio.

The International Maritime Organization’s target to at least halve greenhouse gas emissions by 2050 is going to require rapid investment, but with banks being pushed by tightening regulations to cleanse their balance sheets of climate risk, they also require a rethink in terms of lending priorities.

And so an intervention is being staged.

The Poseidon Principles, launched today by an initial advanced guard of banks representing approximately $100bn of ship portfolio, but soon to be followed by many more including the major Chinese financiers, is the first ever sector-specific alignment of banking portfolios to climate goals.

By requiring the signatories to measure and report the climate alignment of their individual shipping portfolios, this ground-breaking programme will, for the first time integrate climate considerations into lending decisions to incentivise maritime shipping’s decarbonisation.

The Principles are effectively the starting point for pricing in the climate risk of financial institutions’ shipping books.

They also promise to dramatically change the conversation between shipowners and banks.

It won’t be an immediate shift, but when you measure something it’s for a reason, and while the banks will only be disclosing portfolio level measurements publicly, internally it implies a direct impact on the lenders’ decision making at an asset level.

The disclosure of a bank’s portfolio climate alignment score comes with the expectation that CO2 emissions are being reduced over time. And with transparency comes increased scrutiny, accountability and pressure from all sides.

The Principles are more carrot than stick, insist the banks, who prefer to characterise the approach more a case of responsible banks supporting responsible owners. And yet banks will be prioritising liquidity for greener shipping transactions while less of their money is likely to be available in future for refinancing the vessels that fail to comply.

While big blue-chip industry partners to the Principles, such as Maersk, have welcomed the move as a catalyst towards innovation, the prospect of banks “de-risking” their portfolios in line with shipping’s green transition is likely to worry shipping’s squeezed middle stuck with older tonnage requiring refinancing options down the line to stay afloat.

The Principles may be a world first in aligning sector specific climate targets to financing, but they are part of a wider, and increasingly stringent, set of environmental, social and governance (ESG) standards tightening restrictions from capital market lenders and banks.

For traditional, private owners already struggling to access finance amid a long-term trend towards consolidation, the Principles will likely only exacerbate existing problems as the direction of travel towards ever more efficient tonnage and scaled operations with access to capital markets becomes the norm.

The Principles ultimately are a tool to demonstrate that shipping’s key stakeholders are acting responsibly, but they come with likely consequences, winners and losers.

A more modern fleet offers obvious opportunities for shipbuilders able to deliver verifiable efficiency leaps, as opposed to the eco market puff of the past. But that still comes with risks dependent on IMO targets yet to be defined. You could order a ship today, the value of which will drop dramatically when a regulation comes out that takes effect during the lifetime of that asset.

It will reinforce low leverage because the banks will be looking for a faster payback. It will make secondhand financing of older ships much harder to find because they will tend to be less efficient ships and therefore from the bank's perspective they will tend to make the alignment worse, especially with the tightening trajectory from the IMO.

It will lead to faster scrapping, shortening the average lifespan of the world fleet being thrust towards alternative fuels.

And it can only reinforce the existing push towards consolidation, increased requirements for discipline and, perhaps, an end to speculative asset play. It may even make shipping more expensive.

There will inevitably be some casualties amid the shifting finance focus on efficient tonnage, transparency and ultimately complete decarbonisation of the supply chain. But the Poseidon Principles, if embraced beyond the initial banking founders, could represent the start of a better organised, better funded industry prepared to take responsibility for the environmental stewardship throughout the global maritime value chain.

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