Shipowners need a new approach to green finance

Understanding financial incentives and disincentives is critical to managing the transition to decarbonise shipping. Still, many shipowners and clean technology and clean fuel providers may not resonate with the financial institutions they rely on to fund their ships and green projects.

Financing is increasingly being linked to ‘green’ financing structures and one of the key challenges for financiers is to understand and assess downside risk. Shipowners cannot afford to be at the wrong end of this risk assessment. Capital markets expect change to happen faster than the International Maritime Organization (IMO) dictates. As such, shipowners need their own clear decarbonization strategy to ensure funding for the necessary newbuilds and retrofits needed to ensure the economic life of their existing fleet.

Houlder spoke to top executives from container, bulk, cruise, tanker and ferry companies to advance the discussion on how to implement the transition to decarbonization while keeping ships and companies afloat.

An often-cited example of bad past experience is the introduction of the IMO’s 2020 sulfur cap, which despite its global intent resulted in the rules being applied unevenly in some regions of the world. Some owners also point to what they see as costly mistakes made in the lengthy implementation of the Ballast Water Convention. Systems were developed, tested and installed, only to be adapted to changing requirements.

Yet most shipowners accept that non-decarbonization could pose an existential threat to their business, and all believe that success is no longer just about compliance. Financiers who rely on ship profitability see their loan books at risk by not focusing on the environmental performance of those assets and need to ensure the shipowner’s decarbonization strategy is aligned with market expectations.

The perception of the influence of financiers varied significantly between the shipowners surveyed, with the largest differences occurring between large and small shipowners. Large organizations tend to find access to green funding relatively easy, with the challenge of finding projects that fit the funder’s criteria.

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

Many shipowners emphasized that their financiers asked them for more data on their environmental performance when they were looking for financing. Providing accurate environmental data is important not only to provide funders with ongoing information, but also to assess what to deliver when committing to a continuous improvement program at the start of a new financing facility.

The need to find a better and more innovative way of working together and building partnerships was the strongest theme among the shipowners surveyed. Without this improved collaboration, ship owners see obstacles with technology providers, shipyards, financiers and research and development projects limiting their decarbonization trajectory.

The bottom line is that it’s important to be bold and not let traditional ways of working and collaborating suffocate you, and the same goes for green finance. In order to meet the challenge of decarbonization, one has to recognize that in many cases it is about new paradigms and not the incremental development to which shipping has been accustomed.

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