Report: Banks at Risk Over Climate Change

Carbon War Room (CWR) and University Maritime Advisory Services in the U.K. have released research that suggests climate transition pathways pose risks to the banks that hold $400 billion of global shipping debt. 

With the onset of climate policies as soon as 2023, there will be a need for significant capital investment to keep vessels competitive. Navigating Decarbonisation: An approach to evaluate shipping’s risks and opportunities associated with climate change mitigation policy lays out an approach to climate stress-testing of shipping assets and proposes that enhanced due-diligence undertaken today by financiers, shipowners and shareholders can help deliver long-term value and avoid losses by the mid-2020s.  

By examining outcomes of investment approaches in a range of future scenarios in the newbuild dry bulk fleet, the research assesses whether the industry is exposed to climate policy-driven risks and how to manage these risks. 

This is the first known scenario analysis of decarbonization risks in shipping, says CWR. Project finance and corporate lending to the international shipping industry has long been big business for major financial institutions. The 18-month project identified that while some financial stakeholders are aware of stranded asset risks, few banks assess ship efficiency or have lending programs in place to keep assets competitive.

Navigating Decarbonisation is the third instalment of research on stranded assets and climate risk in shipping from CWR and UMAS. It offers a method to analyze how GHG mitigation policies in shipping and national contributions under the Paris Agreement could impact existing and future investments in shipping.

James Mitchell, senior associate for shipping with Carbon War Room, says: “Risk is nothing new to the shipping industry or to the major financial institutions that bankroll it, but climate transition risk is. If a newbuild financing decision is made today, that vessel will very probably have to compete under new IMO or E.U. policy actions before its first drydock. This work suggests that these risks will impact the market and should be considered now.” 

The report is available here.