It is just over three months since a group of 11 banks publicly launched the Poseidon Principles, which are intended to tie shipping finance to environmental performance, so last week’s London International Shipping Week provided an opportunity to give them a three-month appraisal.
It was clear that lenders are taking more interest in their clients’ environmental credentials. For example, Andrian Dacy, CEO and CIO of JP Morgan Asset Management’s Global Transport Group, referred to “the growing focus that capital providers are putting on decarbonisation” during a seminar organised on 9 September by ABS called ‘Journey to 2050: Beyond state-of-the-art’. In the past, he said, “loans were driven by opportunity, not decarbonisation. That is changing.”
What was not clear was whether the Poseidon Principles have the momentum to meet that interest and on a global scale: of the 11 banks that have signed up, 10 are based in northern Europe and one in the US.
A website dedicated to the Poseidon Principles provides a timeline tracing their origin to November 2017. But it was last October’s inaugural meeting in Hong Kong of the Global Maritime Forum (GMF) – which has been is dubbed by some as the ‘Davos of shipping’ – that served as their springboard. Chairman of the drafting group behind the principles is Michael Parker, global industry head of shipping and logistics at Citigroup and a GMF board member; he had chaired the ‘finance’ stream at the GMF.
He spoke last week at a conference held two days after the ABS event that was organised by the International Chamber of Shipping where he explained that the principles had been inspired by IMO’s initial strategy to cut GHG emissions from shipping by at least 50% by 2050. Focusing the principles on that initiative avoids “other regulators who want to interfere in areas they are not supposed to. … We think that’s very important,” he said, because it gives the principles a global, not a regional, basis.
Mr Parker said that the Poseidon Principles’ purpose is for banks to make sure that their shipping portfolios “are on track, in terms of emissions, with the IMO’s trajectory.” As part of the IMO’s strategy, shipowners have to provide fuel consumption information to a data collection system (DCS) that was established by MEPC 70 in October 2016 and banks using the principles will require that information from any shipowner they lend money to.
Next year, he said, those banks will use that data together with the IMO’s trajectory model and the amount of loan outstanding at the end of 2019 to perform a calculation so that they can “report later in 2020 how in line we are with the IMO’s trajectory and report it in our individual sustainability statements and on the website.”
Also speaking at the ICS conference was Elinor Dautlich, a partner at the law firm HFW, which has clients among both banks and borrowers. Although it is still “early days for the Poseidon Principles”, she is already “starting to see these covenants come through in new loans.”
But she was concerned about whether every borrower would be able to provide the fuel consumption data required if they do not operate the ship themselves, for example if it is on a bareboat charter. “A much bigger question,” however, was what the situation would be if a potential borrower’s fleet portfolio did not meet the bank’s own profile on emissions and was refused a loan. “That will be something we’ll have to [watch] as these Poseidon Principles go through.”
Then there is the geographic spread of the banks so far involved. “We are missing the piece in Asia at the moment,” she said, but she believes that Chinese lessors and Japanese banks will eventually join, once they have reviewed the principles “and aligned them with their own internal policies.”
It was a point also made at the ABS seminar where Mr Dacy said there was “a big question as to whether the same approach will be adopted in Asia.” Nonetheless, he said that, from a social perspective, China is becoming more environmentally aware and reported that “some of the Chinese lessors are saying that they will pursue Poseidon-like initiatives.”
Christopher Wiernicki, chairman, president and CEO of ABS, put his finger on a potential weakness of the principles: like IMO’s strategy, they are focused only on CO2 emissions while most lenders now ask for information about a borrower’s environmental, social and governance (ESG) policies.
He described the Poseidon Principles as “a noble idea” that does “a couple of neat things,” in particular by “finally bringing technology to the same table as commercial risk” and linking financial and environmental performance. But “the real challenge will be how to do that and link it to the broader ESG principles,” he added.
Mr Dacy agreed. Assessing a borrower is “not just about the environmental impact. How do you treat your crew? How do you create a transparent organisation? It’s a much broader matrix,” he said. He views the principles – which he had helped draft, he said – as a “launching point to help constituents in the industry to be the best they can then.”
Also speaking at the ABS seminar was John Michael Radziwill, CEO and chairman of ship manager C Transport Maritime. “We are big believers in the environment and that comes before anything else,” he said, but his experience of raising funds is that it relies simply on having “a proven track record and making people money. If you can do that you’ll be able to get capital.”
Mr Parker is confident that the Poseidon Principles will secure more support. He expects to get “all the export credit agencies signed up” which will be important to support the new ship designs that will be needed to achieve the IMO’s target. That will be crucial to bringing shipbuilders into the transition process, he said.
And he told his ICS audience that existing loans with banks taking part in the scheme will not be affected. “This is just one more criterion that we will take into account in the day-to-day decisions we make about the business we do. It’s nothing more than that,” he said.
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