Shipping’s transparency revolution
From the sweeping twin tectonic shifts of digitalisation and decarbonisation to the forensic concerns of sanctions compliance and financial governance — the opening up of shipping is the singular issue at the heart of the industry’s future
Global trade efficiency relies on it, shipping’s decarbonisation transition demands it and both financial and security regulators are monitoring it — the maritime sector’s future is focused on issues of transparency at every level
TRANSPARENCY is the common thread that runs through the most fundamental questions with which the shipping industry is grappling right now.
Amid a slew of Lloyd’s List headlines and a special investigation exposing hidden flows of sanctioned oil cargoes, ‘dark-ship’ subterfuge and offshore obfuscation, that may sound a counter-intuitive assertion to make.
Yet a confluence of security, financial and regulatory forces are systematically hoisting the sector’s corporate veil and slowly changing the fabric of the industry in the process.
This is not a singular process; our transparency thesis rests on a disparate body of evidence covering digital, environmental and regulatory trends.
Nor are we describing a uniform revolution. As is so often the case in shipping, we see a vanguard of proactive leaders — but for the majority, change has been gradually coerced, imposed and ultimately enforced by outside forces well beyond the limited scope of the industry’s own agency.
From the sweeping twin tectonic shifts of digitalisation and decarbonisation to the forensic concerns of sanctions compliance and financial governance — the opening up of shipping is the singular issue at the heart of the industry’s future.
The inexorable force of digitalisation is arguably the most visible vanguard of this trend towards transparency.
The interconnectedness of the digital revolution doesn’t just look favourably on transparency — it requires it.
An average end-to-end container shipment involves more than 30 organisations, more than 100 people and more than 200 information exchanges.
Yet the processes and technology supporting such shipments rarely matches up — and that is a story recreated billions of times over, via $14trn of maritime trade globally that has remained stubbornly analogue and inefficient.
This is now starting to change, courtesy of the blockchain-fuelled digital standardisation that is required to replace the archaic systems of trade currently conducted via an inconsistent mess of e-mail, paper, fax and misaligned Excel spreadsheets.
The detail of the digital revolution will continue to generate petabytes of analysis elsewhere — but for the purposes of our transparency thesis, the focus is the openness and visibility that this technology both enables and requires of everyone.
To link port and terminal operators, cargo owners, customs authorities, freight forwarders, brokers and transportation companies in a seamless process requires a shift in the way the industry works.
While the coding of the digital ecosystem that is supporting this shift has been the focus to this point, the more revolutionary aspect of this shift has, in fact, been the realisation that we need to work in a way that is collaborative and allows for that increased collaboration with other parties, including competitors.
Understanding the technicalities of blockchain initially proved something of a barrier for many, but that process of building trust has gradually managed to win over a majority — at least in the container sector — and the ubiquity of blockchain projects across major cargo interests has forced the hand of even the most reluctant maritime luddites to engage.
Put simply, blockchain lets people who have no particular confidence in each other collaborate. It is a machine for creating trust and, when everyone trusts the information in that chain, value can be created across the entire supply chain ecosystem.
In practical terms, it means that companies can stop spending all of their time and money dealing with the zero value-add of getting information all in one place, trying to standardise it and translate it into a consumable format and doing stuff with the information after spending all that time getting it in a single location.
The opacity of shipping is well understood, but much of that is to do with the volume of information flowing across seaborne trade and the siloed nature of how it is retained and processed.
Getting that information into a standardized and usable format sits at the heart of all digital projects. And, while that process comes with the privacy and security standards built in, the overall trend is one of enhanced visibility across and increasingly integrated supply chain.
In digital terms, transparency is not just desirable; it is fundamental to the whole process. However, our argument is not just one of data transparency.
Shareholders are demanding robust corporate governance, which is now being measured, ushering in an era of ever-more detailed reporting on the industry’s activities and accountability for its carbon output in the process.
Charterers, financiers, governments, counterparties and society at large are forcing through new environmental, social and governance requirements that are making sure capital doesn’t flow in the direction of those who refuse to step out of the shadows or account for their emissions.
Lending to shipping has already begun to hinge on shipowners’ ability to satisfy the banks’ ESG criteria.
In terms of transparency, the message is clear: the more traditional shipowners that wish to stay more opaque will find access to capital very difficult going forward.
And that is significant, considering the fact there is a huge lack of capital for the industry at a time when it faces the dual challenges of decarbonisation and disruptive technologies — such as blockchain, artificial intelligence and autonomous shipping — which will not only change the way we work and run our business, but will also change the way we live.
Today, the big miners, energy companies and traders are all under huge pressure to clean up their act.
Regulators are demanding better risk management; investors are looking for commitment to future clean growth; and campaigners are fighting for bolder commitments.
The nascent emergence of plans from cargo interests to introduce bunker levies to cover cost differentials in opting for zero-carbon fuels, together with transparent charterparties accounting for carbon emissions, indicates a future where cargo interests call the shots in terms of vessel choice.
Of course, these are broad-brush trends that will not apply uniformly across the industry. Among the smaller charterers, transparency is less of an agenda-setter than you may think — and for many state-sponsored shipping companies, politics is arguably a bigger driver of behaviour than market demands to end opaque practices.
A quick glance at last year’s Lloyd’s List Top 100 Ports tells you all you need to know about China’s influence over market dynamics, where transparency is a much more complex affair than simple ESG requirements.
Such trends are inevitably uneven; but in our view, the ultimate direction of travel for operators — regardless of size, corporate structure or region — is now clear.
Those already trading on their sustainability credentials are voluntarily operating with unprecedented levels of transparency regarding their carbon emissions. Yet the voluntary nature of such efforts will inevitably remain short-lived.
At some point, we expect that many shipowners' access to cargo, capital and ports could be at risk if they are considered not to be doing enough to reduce their CO2 footprints.
Today’s monitoring and reporting of emissions will soon enough segue into market-based measures and accountability for carbon will come with a price tag.
Once carbon is transparently priced into maritime trade, that will create a new benchmark of industry transparency — forcing the entire maritime supply chain to account for the full lifecycle of its emissions, not just the specific ‘tank-to-wake’ emissions currently being considered at a regulatory level.
Owners who fail to meet decarbonisation obligations will effectively lose their licence to operate over the coming years.
The final pillar of our transparency argument rests upon enforcement of regulation, both regional and global.
While the global nature of shipping’s cross-border markets is porous and flawed, the regulatory noose is tightening sufficiently in some areas that ensure transparency is never far from the boardroom agenda.
Financial regulation has been intensifying for several years in the wake of successive economic crises and the rise of the compliance officer — finance’s feared in-house policeman — was only partly related to an increasingly politicised sanctions risk that has been so dominant in the industry headlines of late.
Banks fined for aiding corruption, money-laundering — and, yes, sanctions-busting — have beefed up their compliance, risk, legal and internal-audit teams, even as cutbacks elsewhere were made.
And, while there may have been some talk in the financial press of banks having reached “peak compliance”, staffing and investment are likely to remain well above pre-crisis levels.
Shipping’s offshore status is unlikely to change overnight, but there is a growing international agenda targeting anonymous shell companies as the getaway cars of tax-evaders and money-launderers.
When it comes to the murkier end of shipping’s deceptive practices, there has never been a bigger target on shipping’s back.
As Lloyd’s List's recent investigation series into ‘subterfuge shipping’ revealed, there is still an underbelly of shipping operators determined to evade the evolving complexities of sanctions.
Our data-led investigation highlighted how some opaque operators go to great lengths to cover their tracks, not least through regular flag-hopping and class-hopping.
Yet while our own evidence points to a persistent pattern of deceptive practices, heightened scrutiny has only increased the need for additional transparency and due diligence from everyone else.
Legitimate shipping companies are, generally speaking, not knowingly looking to test American resolve when it comes to sanctions — but there is a risk of getting caught out.
Until recently, the defence has been that few have the resources to perform the requisite degree of due diligence to unravel the highly complex networks that support proscribed ventures. Such excuses increasingly don’t wash with the regulators.
Dark corners will always exist, but a lot of the privacy that shipping offered in the past has been lost in favour of accountability.
Global trade is becoming more transparent and resistance is increasingly futile.
Creditworthiness and compliance checks, the ubiquitous ‘KYC’ due diligence, audited financial statements and third-party reports investigating any historical payment problems — this is all now standard practice.
What was once offered up in the hope of earning reputational reward is now considered a basic entry to market expectation from counterparties no longer willing to take on financial risk.
Even the murkier end of the shipping industry’s known grey area is being rapidly reduced, thanks to increasingly sophisticated data analysis and the forensic attentions of international governments and agencies that now monitor every aspect of shipping’s trade links.
Consider the subterfuge tactics of Iran’s fleet ‘going dark’, engaging in ship-to-ship transfers, setting up shell companies and generally playing an elaborate game of cat and mouse to disguise cargo origins.
Try as they might, such strategies are not working. The risk to Iran’s fleet is well understood, but Lloyd’s List is not alone in being able to uncover the companies and structures at play; intelligence agencies, financial and insurance institutions are all tracking activities.
The potential of inadvertently falling foul of this scrutiny on account of unverified third-party providers should be keeping more owners up at night.
While the Trump administration politicised the process, the US-led upgrading of sanctions risk for shipping had been in the works for some time, notably from the financial and insurance sectors.
For those banks and insurers seeking to apply transparency to the opaquest end of seaborne trade, many are only just realising how far they still need to go in order to mitigate the risk that the Trump era in some way helped expose.
While the transition of power in the US may signal some changes in terms of sanctions policy, nobody should be thinking that the focus on shipping transparency will be downgraded as a result.
The requirement to monitor maritime risk is now embedded within financial, insurance and political processes — and all signs point to increased complexity, not less.
Transparency risk mitigation
The trend towards transparency is less a universal theory of everything and more a loosely linked series of coalescing forces, but it warrants attention as a direction of travel.
While transparency of operations will be a prerequisite to access finance and charters for some, the playing field is likely to become increasingly uneven in other areas.
The inexorable force of digitalisation is partly responsible for peeling away shipping’s opaque patterns of behaviour, but it is not the whole story and it will require differing strategies from companies.
Those seeking to avoid inadvertently getting caught in an increasingly complex web of regulatory compliance need to proactively monitor the lack of transparency at the murkier ends of their own supply chains.
As we noted following our recent subterfuge investigation, the issues surrounding secrecy in shipping have been on the regulatory agenda for literally decades.
Yet surely it cannot be long before transparency standards expected of every other major global industry in the 21st century are applied to shipping as well.
Much of this disclosure revolution is positive and overdue, but this is not a shift that the sector can passively accept without question.
With increased transparency comes complexity and significant risk that needs to be carefully navigated.
This article is part of a special report on ‘Transparency in shipping’ which can be viewed here
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