During the GREEN4SEA Athens Forum 2023, HHX.blue’s Scientific Advisor, Dr. Ing Orestis Squinas, discussed sustainable finance, the Poseidon Principles, and the EU Taxonomy, which are currently major developments in European financial markets. A brief overview of the disclaimers and implications for shipping has been provided.
Leaning is a legal requirement that all owners must comply with. The owner is obliged to comply, so there is no difference in his previous compliance with MARPOL or environmental regulations.
However, there are large differences in the internal allocation of funds among financial institutions. Allocation methods are shifting from yield to carbon footprint projections, and as a result the financial landscape is changing dramatically. In practice, this means that the Treasury will require not only a project’s yield but also its carbon footprint to meet its decisions.
EU taxonomy and other regulations require financial institutions to also report their environmental footprint. This means that customers of financial institutions must be compliant and conduct their business in an environmentally responsible manner. Otherwise, the compliance chain will be skewed.
This is therefore a great opportunity for shipping companies to diversify their services by reducing consumption and increasing efficiency. In addition, shipping companies can also benefit from carbon trading and other carbon schemes that attract investors through efficient ESG policies.
The Poseidon Principles are an agreement between financial institutions and related bodies that provide a framework for integrating climate considerations into lending decisions. These Principles consist of private agreements between financial institutions primarily engaged in shipping finance (about 35% of them are concerned with shipping finance).
In addition to applying the Principles, portfolios must improve their environmental performance based on IMO instruments such as the CII, which provide for a 2% or 5% reduction in the environmental footprint of the underlying asset. This is the portfolio trajectory. This means that not only individual projects but also portfolios have to comply with environmental regulations, which is a very interesting development.
This taxonomy is an EU regulation that applies to financial institutions and is not focused solely on shipping or other industries. This is a comprehensive regulation that sets out the rules that financial institutions must follow in order to comply with the taxonomy. The EU classification rules are large and sophisticated documents, but they are also relatively easy to follow. The key points are:
This means that projects are not considered solely from a ship financing perspective. To be considered ‘green’, they must also meet science-based screening criteria according to the EU taxonomy. These are not arbitrary or subjective criteria. Finally, all of these rules are far from perfect, but they are evolving.
meaning of shipping
Activities related to marine transportation include the purchase, financing, leasing, rental and operation of:
- Inland Passenger Water Transport and Sea and Coastal Freight Transport
- Vessels for port operations and auxiliary activities such as sea and coastal cargo, tugs, mooring vessels, pilot vessels, salvage vessels and icebreakers.
- Sea and coastal passenger water transport
There are specific exemptions for vessels engaged in the trade or transport of fossil fuels. These vessels cannot be financed according to this regulation. At the same time, cruise ships and large yachts are exempt from the regulations. Currently in Brussels, as far as I know, there is political pressure to include cruise ships in the classification.
In addition, other regulations for financial institutions are also evolving to tighten environmental compliance.
pros and cons
Failure to comply simply means denial of access to capital. Additionally, some financial institutions in the US and China, which are not subject to EU regulation, have decided to comply as they have noticed improved financial performance of “greener” assets in their portfolios. This means that greener assets are expected to have a better future in the market.
It is possible to follow minimum and maximum compliance strategies. It depends on the demographics of customers the company plans to serve and the resources allocated.
Decarbonization is not only an important topic, but also a major driver of market development. The Poseidon Principles and the EU Taxonomy are just the first steps towards comprehensive and applicable sustainable financing.
The only thing that really changes the status quo is the carbon price. This price is currently difficult to estimate and incorporate into financial planning, making the risk assessment strategy development process more challenging.
The above article is adapted from Dr. Ing Orestis Schinas’ presentation at the 2023 GREEN4SEA Athens Forum.
Find out more by watching his video presentation below
The views presented are those of the authors only, do not necessarily reflect the views of SAFETY4SEA, and are intended for information sharing and discussion only.