Money makes the world go green?

“It’s only a matter of time — and it’s already happening to an extent — [until] shipowners will find it increasingly difficult to get finance for their ships unless they have green credentials,” Bob Sanguinetti, chief executive of the UK Chamber of Shipping, told an assembled audience at a conference organised by the UK branch of the Women’s International Shipping & Trading Association on the first day of London International Shipping Week 2019 (LISW19). Perhaps while saying this, his mind was on the Poseidon Principles — the new “global framework for responsible ship finance” which has attracted much attention since it was launched in June this year.

The principles, established by 11 banks (including Citi, Societe Generale and ING) representing around $100bn in shipping finance, see those who sign up to them commit to integrating climate considerations into decisions on lending. According to the website for them, the values create a common, global baseline to quantitatively assess and reveal whether financial institutions’ lending portfolios are in line with adopted climate objectives. The site claims that “they set a benchmark for what it means to be a responsible bank in the maritime sector”.

A sea change

Such is the spread of the concept of ‘green finance’ — defined by the International Trade Centre as including all initiatives taken by public and private agents in developing, implementing, supporting and promoting projects with sustainable effects through financial tools — within the shipping sphere, one of the world’s biggest law firms has seen it fit to pass comment. In an article published in September about green, or sustainable, financing in the shipping and offshore industries, Norton Rose Fulbright says that more and more, banks and financial institutions must justify their investment decisions on the basis of sustainability and environmental risk. The law firm explains that while the Equator Principles, first launched formally in 2003, have applied to particular asset finance transactions for some time, a heightened focus on sustainability measures within financial institutions and banks, the Poseidon Principles’ founding, the introduction of the Loan Market Association’s Green Loan Principles and the bringing in of the Sustainability Linked Loan Principles are all leading to a shift in focus.

“With regulatory changes and increased public focus on environmental matters driving change in the shipping and offshore industries, and certain capital providers available and willing to finance that change, there is scope for the right projects to receive financing at the right price,” Norton Rose Fulbright says. “If this mixture of regulatory impetus and technological and financial ingenuity leads to a greener and more sustainable shipping and offshore industry, we will all benefit.”

According to the law firm, one driver for financial institutions and banks to extend green or sustainable loans is the possible ability to have access to a new kind of investor base through the capital markets. Green or sustainable bonds can be issued — the difference from conventional bonds with these is that the issuer offers a set of green, or sustainable, criteria and then undertakes to use the capital raised for initiatives falling within this criteria. Consequently, banks and financial institutions might have capital designated purely for green or sustainable projects. Deploying this capital, Norton Rose Fulbright notes, can need third-party views to confirm the expenditure adheres to the criteria. At present, the EU is developing legislation on the criteria.

If a project fails to achieve the desired result and thus does not match up to the criteria for the bond, an investor might argue that they have been misled by the issuer. Consequently, the bank or financial institution will need any initiative it invests in which uses such funds to report frequently and will set tough criteria to make sure it stays adhering to any green or sustainable bond’s terms. Norton Rose Fulbright also claims that a developing trend is the economic incentivisation of better sustainability performance. The law firm anticipates that this trend will carry on as sustainability and the environmental effect of the shipping and offshore sectors gain ever-bigger focus.

The finance factor

During LISW19, Andy Dacy, global head of J.P.Morgan’s transportation group, told of the influence the environment now has on institutional investors.

“There is not one institutional investor in the West that is not thinking about the environmental, social and governance (ESG) agenda and the ESG status of their investments,” he claimed. “The reality is that the largest pools of capital have made sustainability a priority. These issues may not trickle into your business straight away, but capital moves the market and chief information officers or finance executives are all thinking that way.”

Unsurprisingly, the Poseidon Principles were also a topic of discussion during LISW19. Michael Parker, chairman for shipping and logistics at Citi and chair of the drafting committee for the values, took part in a panel discussion entitled “The New Financing Realities” during the International Chamber of Shipping’s 2019 Conference, which was hosted during the week. He said that the principles are “very much supporting the International Maritime Organization’s direction” and mentioned the role of capital in helping generate environmental change.

Elinor Dautlich, HFW Partner, noted that currently, the values are lacking input from Asia, although her organisation is anticipating that this will come in the future. She also said that some geopolitical issues exist. On a different note, Rhian-Mari Thomas, chief executive of the Green Finance Institute, wanted to pick up Mr Parker’s point about “finance being the facilitator of the transition, as opposed to being the stick”.

“Green finance … isn’t the silver bullet,” she said. “It’s certainly not ‘the green bullet’. It is a facilitation mechanism.”

The perspective, Ms Thomas noted, is shifting from one of “green good, brown bad” to looking at a gradation of risk. Green bonds, she said, have existed for a decade and excluded higher-emitting and harder-to-abate sectors from getting hold of this kind of capital. However, what is happening with green now is a gradation of risk and a gradation of opportunity that over time is set to witness an alteration in the cost of funds.

“That’s not something to be afraid of,” she explained. “It’s a transition, and it needs to be done in a collaborative way between industry, policymakers and the financier.”

The chief executive also said that green finance isn’t “magic finance” — it still needs rigour and credit, and repayment is still required. However, she called for getting financing into high-emitting and harder-to-abate fields, having additionally noted that banks and other financiers are increasingly set to demonstrate the amount of their book “on a transition trajectory”.

It remains to be seen whether green finance will be the driver of a transition to a more environmentally-friendly shipping industry.

The Baltic Exchange will hold its next Ship Finance Executive course on November 11 and 12 in UK capital London. More information can be found here.