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Ship finance and GHG: Strengthening the Poseidon Principles

In June 2019, 11 banks announced the launch of the Poseidon Principles, a framework to help them determine climate risk of shipping portfolios. In this article, Samantha Fisk looks at the Principles and asks how effective they will be.

The latest initiative for the shipping industry are the Poseidon Principles, launched in the early summer this year. They will, on paper at least, see the finance sector begin to take a more active approach towards helping reduce climate change according to one of the leading names behind their development, Michael Parker, managing director, Global Industry Head for Shipping, Citigroup .

But he admits there needs to be work from all parties to make them work.

One of the key issues faced by shipowners when addressing environmental regulations, particularly pending CO2 reduction rules, is cost through new technology application; and in some case’s overhauling of fleets of vessels to meet with the regulations.

Tanker owner and operator Euronav was one of the advisers to the finance sector as the Poseidon Principles were written

The question of how this will be funded, has been sitting on many people’s lips, as the push to drive the industry forward to a greener future continues. Now, however, the ship finance sector has stepped up and begun working with key players – Mærsk, Cargill, Euronav, Gram Car Carriers, Lloyd’s Register and Watson Farley & Williams – to develop the Poseidon Principles.

These Principles are a framework for assessing and disclosing the climate alignment of ship finance portfolios, which have also been based around the Equator principles, a risk management framework adopted by financial institutions for assessing and managing environmental and social risks associated with development projects.

The Poseidon Principles aim to create a global baseline, which the companies involve say will support and work towards greater goals for our society and also align portfolios to be more environmentally responsible.

The principles are set out in four categories, assessment, accountability, enforcement and transparency. These principles also run in-line with the IMO’s own emission reduction targets, such as reducing shipping’s total annual greenhouse gas emissions (GHG) by at least 50% by 2050 compared to 2008.

Michael Parker also notes that this is also a huge advantage for the industry as the shipping industry avoids it regulations being caught up in national regulations, which also makes it unique along with the aviation industry.

However, with many initiatives in the industry trying to coerce shipping in to becoming more environmentally friendly, is this just another one to add to the list or can this latest initiative have an impact? Poul Woodall, director – environment and sustainability, DFDS, the Danish ferry and logistics company, echoes other industry voices, in that it’s a start, but there is still a long way to go.

“They have adapted a function, none of which works”, he says of the Principles as they currently stand. “The problem is that they are looking at a proxy for a ship, rather than an actual load”. He notes that as vessels operate with different capacities a proxy would not give a true indication of a ships carbon footprint..

Work in progress

Whilst Parker agrees that it is still early days for the principles, they have received support from the industry. “It is a framework for other key issues. It will be about how principles will fit and be amended over time. It will also take in other issues such as ship recycling, when vessels come to the end of their useful life.”

“second-hand ships and financing them will also be an issue, due to them not being as environmentally efficient. We expect to see more in the next two to five years and the impact that this will have.”
Michael Parker, CItiGroup: “second-hand ships and financing them will also be an issue, due to them not being as environmentally efficient. We expect to see more in the next two to five years and the impact that this will have.”

He further adds that if there is any doubt, this will come when portfolio alignment percentages are published to see where the alignments are set. All data that will be collected is information that exists in portfolio’s already, so will not break with any confidentiality of the parties involved.

There could also be further fall out from the principles as shipowners look to invest in more environmental shipping methods. “Many ship types may have a shorter life as a knock-on effect of the Poseidon Principles. Overall though the financing of the industry will change”, he says.

He also adds that older vessels will also be impacted by the principles: “second-hand ships and financing them will also be an issue, due to them not being as environmentally efficient. We expect to see more in the next two to five years and the impact that this will have.”

The car industry in a bid to help drivers improve their driving has seen insurance companies launch trackers that monitor the speed that a car travels, to gauge whether the driver is a safe driver. Parker notes that there is currently technology being tested in the market around live tracking, where we could see something like this evolve in the shipping industry, “would be helpful for owners”, he highlights.

This could be another avenue yet to be explored by the maritime insurance industry, as to how a tool like this could be utilised to help shipowners. Unfortunately, at the time of publishing insurers such as North P&I was unable to comment about the effect that the Poseidon Principles could potentially have on the insurance market, as they have not decided on a position as yet.

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