ShareAction’s Christian Wilson argues that investors should widen their engagement beyond the fossil fuel industry and push banks to align their shipping portfolios with the Paris climate goals
Institutional investors have been instrumental in engaging with banks on fossil fuel financing. In recent years, numerous banks have updated their lending policies and ended financing for projects ranging from coal mines to tar sands. This battle is by no means won, but these wins demonstrate the power of coordinated and targeted investor engagement.
A new report by ShareAction, called Changing Course: Banking Financing of the Shipping Industry, argues that to be effective stewards, institutional investors need now to widen the scope of their engagement with banks to beyond the fossil fuels sector. The low-carbon transition will require fundamental change across all industries and as financial intermediaries, banks are uniquely positioned to facilitate this transition. With the right policies they can redirect capital flows, mitigate climate-related risks, and use their influence to push for change at companies deemed climate change laggards.
If left unregulated, shipping could make up 17% of CO2 emissions by 2050. Inaction is not an option
Shipping is one of these industries that warrants attention. Relative to other carbon-intensive industries it has faced less scrutiny, falling outside the scope of the 2015 Paris Agreement. Yet shipping emissions account for 2.4% of global greenhouse gas (GHG) emissions and could rise by as much as 250% by 2050 under a business-as-usual scenario, according to the International Maritime Organisation (IMO).
Changing the course of the shipping industry will not be easy. The current fuel of choice, heavy fuel oil, is cheap and highly polluting, while long journeys and heavy loads make switching to alternative fuels much harder than for cars or trains. However, if left unregulated, the industry could make up 17% of global CO2 emissions by 2050. Inaction cannot be an option.
Fortunately, in 2018 the IMO announced a target to reduce shipping emissions by at least 50% by 2050. This was swiftly followed by Maersk, the world’s largest container shipping company, announcing its own target of net-zero emissions by 2050, going beyond the IMO’s target and aligning with the Paris Agreement.
To capitalise on this momentum, banks must use their influence to push others to match Maersk’s level of ambition, while implementing their own policies to support decarbonisation. Doing so is crucial not just from an environmental standpoint, but also to mitigate climate-related risks.
As regulators seek to avoid runaway emissions, the shipping industry faces regulatory uncertainty. Already we have seen companies scramble to meet the IMO 2020 sulphur cap at a significant cost. In order to comply, Carnival, the cruise liner operator, was reported as spending $500m on open-loop scrubbers, a technology now banned in China, the UAE and Singapore over environmental concerns.
Ships with higher energy efficiency do not just reduce carbon emissions but have a higher resale value
Another key risk is a dependency on fossil fuels as a driver of seaborne trade. In 2017, 40% of seaborne trade was in fossil fuels. However, due to the energy transition, trade volumes of coal and oil could fall 50% and 33% respectively by 2035, according to the International Transport Forum, a challenge for an industry already grappling with overcapacity and rising debt levels.
When lending to shipping companies, banks need to consider these extra headwinds. By incorporating climate-related risks into financial analysis they can improve the resilience of shipping loan portfolios. Ships with higher energy efficiency, for example, do not just reduce carbon emissions but have a higher resale value, acting as better-quality collateral in the event of default.
In recent years, the growth rate of seaborne trade and shipping emissions has diverged. A combination of energy efficiency gains and slow-steaming, where ship speeds are cut to reduce fuel consumption, has led to a drop in emissions intensity of 37.1% between 2009 and 2017 in container shipping.
These figures are encouraging, but to align with the goals of the Paris Agreement, which requires zero net shipping emissions by 2050, absolute emissions have to be cut. A transition to low-carbon alternatives such as electric and hydrogen power is required, with shipping companies already piloting zero-emission vessels.
These trends need to continue and accelerate. As providers of capital, banks must step up and align their shipping portfolios with the Paris goals, incorporate energy efficiency into credit risk analysis, and use their leverage to ensure that shipping clients are, at a minimum, working towards IMO emission reduction targets. Institutional investors need to engage with banks on these steps. Due to the carbon-intensive nature of the shipping industry and the shrinking window available to meet the goals of the Paris Agreement, this must be a priority.
Christian Wilson is senior research officer at responsible investment NGO ShareAction.