Sustainability-linked loans will emerge at the forefront of shipping finance as investments of $1.4 trillion-$1.5 trillion are needed over the next three decades for technology, operations and fuels to halve shipping's carbon emissions by 2050, a top banking executive said late April 20.
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Around 87% of these investments are projected to be land-based such as in low- or even zero-carbon fuels, Roger Charles, an executive director with Standard Chartered said at the Marine Money conference in Singapore.
The rest of the investments are likely to be directly ship-related, such as in technology efficiency and operational improvements including speed management, Charles said.
The ongoing energy transition and decarbonization drive has accelerated the hunger for maritime finance during the coronavirus pandemic. Standard Chartered, which signed the Poseidon Principles on April 20, estimates that $350 billion will have to be committed by 2030 alone to achieve regulatory goals for lower carbon in shipping.
The Poseidon Principles or PP are a framework that aims to reduce carbon emissions in shipping in line with global targets. More than two dozen banks with a global shipping loan portfolio of over $185 billion are signatories to the PP, representing around half of all maritime finance, and have committed to track, monitor and drive down carbon emissions in their projects. It also helps quantitatively assess and track the financed carbon emissions.
Eco-friendly or carbon-linked shipping loans are becoming more common at a time when the UN's International Maritime Organization has proposed new decarbonization rules, expected to be in force by end 2022. They will require all ships of 5,000 gross tonnage and above to calculate their carbon intensity to attain a specific rating on a sliding scale of A to E and then show improved performance in terms of lower emissions.
Sustainability-linked shipping loans
The infrastructure to reduce carbon in shipping does not yet exist and therefore massive additional capital is needed to develop it, Charles said.
While there are no prescribed guidelines on such loans, the Energy Efficiency Ratio, which is the ratio of ship's carbon emissions against actual capacity or distance travelled, can be incorporated. It takes into account fuel consumption, distance travelled and deadweight tonnage. Another criteria is the amount of carbon emitted per ton mile of work. It usually encompasses multiple voyages and measures a ship's carbon emissions per unit of transport work.
Charles said there is currently a debate over whether money used for funding LNG- and hydrogen-fueled ships and to retrofit ships that are not used to transport fossil fuel-derived products are acceptable or not as "green proceeds". The market is developing some exceptions, if commitment to a "reduced emissions pathway" can be established.
He pointed out that at presently decarbonization in shipping can be achieved through LNG, biofuels and operational efficiency in ships but gains will be limited due to bottlenecks such as loss of methane in supply chain and combustion, deforestation and changes in land use.
Future solutions will include better technologies such as efficient dual fuel engines, modification to internal combustion, use of fuel cells and batteries for electric power, particularly for short coastal voyages, and hydrogen derived fuels for long hauls, he said.
Energy efficiency measures relating to shaft generator, propeller polishing, propulsion improvement devices, hull coating, waste heat recovery and slow steaming are important but not sufficient to achieve complete regulatory goals, he added.
This is because some of these measures have a fuel saving potential of 5% or less for the main engine. As a result, bigger clean shipping technology projects involving alternative fuels will have to be taken up, market participants said.