Successful Green Finance Requires Collaborative Thinking


Ocean decarbonization is being driven more by banks and charterers than regulation, and green finance remains a key theme

handshake of two people in suits

Published July 4, 2023 at 7:19 PM

Sean McLaughlin

The shipping market has changed a lot in the last 10-20 years, especially on the financial side. After the 2008 crash, many traditional shipping banks exited the market. For most of the two decades leading up to the recent surge, the sector offered a low return on capital, but now faces a huge investment need to meet the challenges of decarbonisation. .

Capital markets want change to happen faster than IMO mandates. Most importantly, owners need a clear sustainability strategy to secure funding and deliver the necessary new construction or renovations. Getting high cash and carbon returns from your investments is essential for both.

Holder continues to be approached by multiple alternative funders seeking investment opportunities that can contribute to improved vessel lifecycles and operational efficiencies. They are looking for owners who have the ability to operate but may not have access to funds. Meanwhile, ship owners and operators are exploring a wide range of options to best manage decarbonisation risks.

To bridge the gaps in current partnerships and help develop an integrated decarbonization transition, the team recently targeted senior executives from small and large shipowners in the container, tanker, bulk carrier, cruise and ferry sectors. A qualitative study was conducted. All of the senior industry officials interviewed confirmed their willingness to collaborate on projects that enable the adoption of new technologies.

Across the industry, we need more proactive independent conveners that foster project collaboration and data sharing on emerging clean technologies. “We need a mechanism to easily unite and find the right partners,” said one executive. This data is required by funders to assess environmental performance.

Conveyors are the solution. They help share the costs of trialing new technologies while all shipowners benefit. It also helps ship owners manage the requirements of financiers and other stakeholders.

loan risk

This is important. Because financing is increasingly associated with ‘green’ financing structures, it is not just about meeting green bond criteria. One of the most important challenges for funders is understanding and assessing downside risk. Ignoring the impact of decarbonization or not planning for it properly poses significant risks for any business. Owners cannot afford to be on the wrong side of risk assessment.

The Poseidon Principles provide evidence that green thinking in finance is becoming the norm, not the exception. While there are social good intentions behind this principle, the commercial impetus behind the signature is compelling. If banks do not recognize the impact of climate change on asset longevity, the devaluation of underlying assets will result in significant impairment of loan books.

Most of the shipowners surveyed believe failure to decarbonise could be an existential threat, and all of them reflect the view that success is no longer just about complying with regulations. are doing. It is therefore not surprising that financiers who rely on the earning power of their vessels believe that a lack of focus on the environmental performance of those assets poses a risk to their lending books.

Ultimately, understanding the economic incentives and disincentives is crucial to navigating the transition to decarbonisation of shipping, but many, especially smaller shipowners, and clean technology and fuel providers may feel out of step with the financial institutions they rely on for funding. about their ships and eco-friendly projects.

Funding security

Perceptions of funder influence varied widely, with the largest differences between large and small owners. Larger organizations tend to see green finance as relatively easy to access, making it a challenge to find projects that meet the criteria of funders.

Smaller operators typically do not issue their own bonds, but, like larger operators, are required to meet environmental performance criteria in order to receive financing. They increasingly perceive that the cost of financing is linked to their environmental performance and may even risk defaulting on their loan covenants if they fail to achieve baseline environmental performance.

Environmental performance is becoming more and more prominent in any financing discussion. While shipowners are not issuing bonds, banks offering loans may be focused on complying with the Poseidon Principles, and in any case the threat to a vessel’s earning capacity is the value of the funders’ securities. is also a threat to

Many say that funders ask for more data related to their environmental performance when seeking financing. Being able to provide accurate environmental data is not only important in keeping funders informed on an ongoing basis, but also what the deliverables are when undertaking continuous improvement programs at the start of new funding facilities. It is also indispensable in evaluating whether

Collaboration is a big part of the answer

All senior industry officials interviewed confirmed their willingness to work together on projects that accelerate the adoption of new technologies. They believe it is critical to achieving the rapid and fundamental change that is increasingly expected by charterers, financiers, consumers and internal stakeholders who want to achieve their goals and promises. I understand.

But we cannot expect to not compete or overcome these complex challenges in an ad hoc manner. Regulators, financial institutions, charterers and consumers are setting goals and planning, but it is the A shipping company.

The key to breaking down this barrier to decarbonization is to think outside the box, without following traditional collaborations and ways of working. In most cases, tackling the challenge of decarbonisation will require new ideas, new approaches and new partners, rather than the gradual evolution of the status quo to which much of the shipping industry is accustomed. You can read the results of Mr. Holder’s shipowner survey here.

Sean McLaughlin is a strategy consultant at Holder.

The opinions expressed herein are those of the author and not necessarily those of The Maritime Executive.

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