While environmental, social and governance issues (ESG) may not be on the agenda of all shipping company boards, this should change very soon.
Maritime transport is a major source of greenhouse gases (GHG), representing about 3% of annual global GHG emissions. The United Nations International Maritime Organization (IMO) has adopted an initial strategy to reduce GHG emissions from ships and aims to phase them out as soon as possible in this century. The main strategic objectives include (i) reducing the carbon intensity of international shipping by 40% by 2030, pursuing efforts towards 70% by 2050, compared to 2008 levels and (ii) reduction of total annual GHG emissions by 50% by the year 2050, compared to 2008 levels.
In accordance with the latest European Union (EU), the maritime sector will be included in the emissions trading system (EST) by 2024. The measures have an extraterritorial scope and will also affect the movement of goods outside EU borders. When the new proposal enters into force, a “shipping company” (to be defined under the new regulation) will have to buy allowances for 50% of the emissions produced by ships of 5,000 gross tonnage or more for voyages connecting the EU and non-EU Ports (unless the distance is less than 300 nautical miles, in which case 100% of emissions). In this regard, some players have taken upstream measures to manage this cost of compliance. For example, a shipping company has announced that it will impose surcharges on its customers from next year, in anticipation of legislative revisions.
From 1 January 2023, all ships will have to calculate their achieved energy efficiency Existing ship (EEXI) to measure their energy efficiency and initiate data collection for reporting their carbon intensity indicator (CII) and CII rating. The EEXI will apply to existing vessels of 400 gross tonnage and the CII will apply to vessels of 5,000 gross tonnage and above. This is in line with the IMO regulations to introduce carbon intensity measurements which came into force on 1 November 2022. The CII and EEXI regulations are listed in Annex VI of the International Convention for Pollution Prevention by ships (MARPOL). As of November 1, 2022, MARPOL Annex VI had 105 Parties, representing alone 96.81% of the world’s merchant shipping in tonnage.
The growing number of ESG regulations reflects the importance that investors, customers and other stakeholders place on the sustainability agenda of shipping companies. Investors integrate ESG risk factors into their decision-making processes. It is no longer uncommon for ESG criteria to be used in the assessment of a shipping company’s ability to achieve long-term sustainable growth and therefore access to financing.
Recent market trends and customer demands for a net-zero supply chain are driving shipping companies to prioritize ESG and provide quality ESG information for investors. This is further accelerated by recent initiatives, such as the Poseidon Principles which are being adopted by major banks and marine finance providers. The Poseidon Principles are an industry framework used to assess and disclose the climate alignment of ship finance portfolios. It is not uncommon for signatories to the framework, primarily exposed to shipping, to choose to finance a shipping company with an established ESG strategy and a published ESG report rather than a company that does not.
The “S” component of the ESG includes traditional maritime risks such as accidents, compensation, crew safety and welfare issues. It focuses on the measures adopted by the company in terms of managing stakeholders such as customers and employees, including the crew. IMO’s international safety management (ISM) provides an international standard for the safe management and operation of ships and for the prevention of pollution.
Apart from corruption, ownership transparency is also a relevant issue for the shipping industry. A shipping company that prioritizes the “G” component of ESG will need to put in place processes and policies that will assure its stakeholders that these ESG-related risks are being addressed by management. Businesses should also be aware of the changing sanctions landscape and the impact of laws such as the UK Bribery Act and US FCPA on their operations. It is essential that shipping companies take the necessary steps to mitigate these risks to avoid non-compliance resulting in fines and loss of reputation.
What shipping companies can do to stay ahead
Companies should define their sustainability goals and the actions they plan to take to achieve the results. It is important to involve stakeholders and set specific and achievable goals. For shipping companies, the pressure is to take the “E” component into account in ESG, in light of upcoming regulations. In addition to switching to fuels with lower carbon emissions, shipping companies can also consider including climate clauses in charter parties, such as the following:
- Encourage parties to consider opportunities and cooperate to maximize vessel load ratio and minimize repositioning trips in ballast during the charter period
- A contractual obligation in charter parties for both parties (charterers and owners) to take all reasonable steps to maximize energy efficiency
- An optional mechanism for time charter parties, to share the cost (between owners and charterers) of upgrades that improve the energy efficiency of time charter vessels
Businesses must start planning ahead and be prepared to meet growing stakeholder demands and comply with upcoming regulations. This will require the effort of the whole organization and, above all, the buy-in of management to free up the time and resources necessary to navigate towards a sustainable future.