Funding Identified as Key Challenge in Decarbonizing Shipping

Source: 4/20/2021, Location: Middle East

At a recent Watson Farley & Williams webinar, speakers from DNB Bank, Shell, LR and MSC highlighted funding as a major challenge for shipping's decarbonization.

“The targets are extremely ambitious. We do not have an option to fail. And we need collaboration across all stakeholders,” declared Christos Tsakonas, Global Head of Shipping at DNB Bank. He was discussing the decarbonization challenge facing international shipping at a webinar organized by law firm Watson Farley & Williams (WFW) and specifically the thorny issues of who is going to pay for the multi-trillion-dollar process. The banker did not mince his words. “Words are cheap,” he said, “but people need to actually put their money where their mouth is.”

Spread risk
Revealing that the bank would use its own balance sheet, he said that it would also use its expertise to structure risk and spread it between stakeholders. “We need to be prepared to share,” he declared. Following the launch of the Poseidon Principles, Tsakonas pointed out that for the first time, banks were now able to put a number on the carbon intensity of their loan portfolios. It was not a perfect tool, he acknowledged, but it was definitely a step in the right direction.

Katharine Palmer, LR’s Global Sustainability Manager, warned that a wait-and-see approach to the energy transition process would mean no chance of achieving the IMO’s ambitions. “Net zero by 2050 is the end goal but system transformation must begin now. The longer we leave it, the harder it will be,” she declared, warning of the danger of going down one fuel technology route to the exclusion of others, and pointing out that emissions do not relate only to carbon. The immediate challenge, she said, is to get to 2030 with a scalable option so that 2050 targets can be achieved. “Essentially we are looking at the transition pathways that are safe, sustainable, commercially viable and meeting society’s needs in terms of emissions,” she said.

Meanwhile, MSC’s executive vice president for maritime policy and government affairs, Bud Darr, warned owners to be careful what they wished for. They should consider the profile of customers through the lifecycle of their assets. Clearly this is particularly relevant for cruise lines, but Darr was talking in broader terms. “Think about your customer profile and what their needs, their values look like for the future,” he said, pointing out that younger people today have already think very differently to those in the older demographic.

WFW report
The webinar followed publication of a report written by WFW Global Maritime Sector Co-heads, Lindsey Keeble and George Paleokrassas: The Sustainability Imperative. ESG – Reshaping the Funding and Governance of Shipping. The document is a result of wide-ranging, in-depth interviews with owners, charterers and ship finance institutions, as well as a survey of 545 senior executives across those three sectors. Some of its findings are troubling.

One conclusion of the report notes widespread and growing concern about shipping’s emissions and yet, seemingly in contradiction, the fact that nearly a third of shipowners do not consider environment, societal and governance (ESG) criteria particularly important when making investment decisions. This is in marked contrast to shipping bankers, almost 90% of whom now regard ESG issues as having some, significant, or even crucial importance in their financing decisions.

Other conclusions from the survey include the likelihood of more cooperation between industry participants as they pursue decarbonization objectives, with as many as two-thirds of shipowners expecting to enter into joint ventures to invest in innovation over the next five years. Another concern is that many owners are wary of committing to new technologies, the survey found. More than half of those quizzed do not expect to use a non-hydrocarbon fuel in the next ten years while a similar number do not expect to install fuel efficiency hardware in the next five years.

Who pays?
This, unfortunately, boils down to money. From a business perspective, why would owners invest in technologies from which they would reap little or no benefit? If charterers are footing the bunker bill, as is the case under many charter contracts, any steps to raise fuel efficiency is a direct benefit to shipping’s customers, not the owners of ships that transport their cargoes.

Both MSC’s Darr and DNB’s Tsakonas referred to carbon levies, in whatever form they might take – either some form of carbon pricing, or an emissions trading scheme such as the EU has in place and in which shipping will soon be included. Darr sees some form of carbon pricing as inevitable if the industry is to take up alternative low- or zero-carbon fuels on the scale that is required.

Meanwhile, Shell’s General Manager for Commercial Shipping and Strategy, Claire Wright, says that funding the energy transition will require cross-sector commitment. And she stressed the need for fuels to be assessed on a well-to-wake basis, rather than the shipping industry’s tank-to-wake metric. Pointing out that no alternative fuel currently being considered has an energy density equivalent to the hydrocarbons used in ships’ engines today, Wright also said that the operation of ships would have to become more efficient in the future. She did not elaborate on this but fewer and shorter ballast hauls, more efficient port calls, and voyage optimisation technologies are all relevant possibilities.

Wright did not refer to the oil major’s recent commitment on VLCC charters, a timely example of cross-sector collaboration. Shell will sign seven-year charters for ten new LNG dual-fuelled VLCCs with three separate shipowners – Advantage Tankers, AET, and International Seaways.

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