Success With Green Finance Requires Collaborative Thinking

The shipping market has changed drastically over the last 10-20 years, particularly on the funding side. Many traditional shipping banks left the market after the 2008 crash. For most of the 20 years leading up to the recent spikes the sector has provided low returns on capital, yet it now faces a need for massive investment to meet the challenges of decarbonisation.

Capital markets are looking for change to take place at a faster rate than the IMO is dictating. Most importantly, owners require a clear sustainability strategy to secure funding and deliver on the required newbuilds and retrofits. Getting a strong cash and carbon return on investment is essential for both.

Houlder continues to be approached by several alternative funders who are looking for investment opportunities where they can help deliver life cycle or operational efficiency improvements to vessels. They are looking for owners who have the operational capabilities but may lack access to funding. Meanwhile, ship owners and operators are broadly exploring the options for best managing their decarbonisation risk.

To help bridge the current gaps in collaboration and to support the development of a unified decarbonisation transition, the team recently undertook a qualitative survey of senior executives from large and small ship owners from across the container, tanker, bulk, cruise and ferry sectors. Every senior industry player interviewed confirmed that there is a willingness to collaborate on projects that will enable the uptake of new technology.

Industry-wide, there is a need for more proactive, independent convenors to facilitate project collaboration and the sharing of data on new clean technologies. “We need a mechanism to easily come together and find the right partners,” explained one executive. This data is, in turn, required for funders to assess environmental performance. 

Convenors are the solution. They can help ship owners share the cost of trialling a new technology whilst giving them all access to the benefits. They can also help ship owners manage the requirements of financiers and other stakeholders.

Loan risks

This is important, because funding is increasingly being linked to “green” financing structures, and it’s not just about meeting the criteria for Green Bonds. One of the most important challenges for a funder is to understand and assess downside risk. Ignoring or not adequately planning for the impact of decarbonisation is a massive risk for any business. Owners cannot afford to be at the wrong end of that risk assessment.

The Poseidon Principles provides evidence that green thinking in finance is becoming the norm, not the exception. While there is good social intention behind the principles, the commercial drivers behind signing are compelling. If banks do not recognise the impact of climate change on asset life, they will end up with loan books that are severely impaired due to devaluation of the underlying security.

Most ship owners surveyed believe that not decarbonising could become an existential threat, and all reflected a view that success is no longer only about following regulation. It’s not surprising then that the funders who rely on the earning capacity of ships see the risk to their loan books of not focusing on the environmental performance of those assets.

Ultimately, understanding financial incentives and disincentives is vital to navigating shipping’s decarbonisation transition, yet many, especially small, shipowners, as well as clean technology and clean fuel providers, can find themselves out of step with the financial institutions that they rely on for the funding of their vessels and green projects.

Funding security

The perception of the influence of funders varied significantly, the biggest variation being between large and small owners. Large organisations tend to see access to green finance as being relatively straightforward, with the challenge being finding projects which match the funders criteria.

Smaller owners generally don’t issue their own bonds, but alongside the larger operators they are being asked to meet environmental performance criteria to access finance. They increasingly see the cost of their funding being linked to their environmental performance and can even find themselves risking default on their lending covenants if they fail to meet baseline environmental performance.

Environmental performance is an increasing focus in all financing discussions. Whilst the ship owner may not be issuing bonds, the bank providing a loan may focussed on compliance with the Poseidon Principles, and in any event a threat to the earning capacity of a vessel is also a threat to the value of the funder’s security.

Many reflected that they are being asked by their funders for more data linked to their environmental performance when seeking finance. Being able to provide accurate environmental data isn’t just important in providing ongoing information to funders its essential in assessing what is deliverable when committing to a program of ongoing improvement at the commencement of a new funding facility. 

Collaboration is a big part of the answer

Every senior industry player interviewed confirmed that there is a willingness to collaborate on projects that will accelerate the uptake of new technology. They understand that it is critical to achieving the rapid, fundamental change that is increasingly expected from charterers, financiers, consumers, and internal stakeholders who all want to deliver on their own goals and promises.

Yet, they can’t be expected to not compete or to overcome these complex challenges in an ad hoc way. Regulators, financiers, charterers and consumers are setting goals and making plans, but it is the shipping companies that must manoeuvre multi-decade assets forward and meet many of the practical challenges involved.

Thinking outside the box and not conforming to traditional ways of collaborating and working will be key to breaking down this decarbonisation barrier. In most cases, stepping up to the decarbonisation challenge will require new ideas, new approaches and new partners, rather than the status quo gradual evolution many in shipping have become used to. You can read the outcomes of Houlder’s shipowner survey here.

Sean McLaughlin is a Strategy Consultant at Houlder.