New compact reflects financial institutions' commitment to green shipping
Finance has long been identified as a crucial enabler for the large-scale energy transformation necessary to achieve a low-carbon future. Recent trends have seen investors and lenders place greater emphasis on sustainable finance.
The Poseidon Principles represent a landmark achievement as the first global, sector-wide, self-governing compact among financial institutions to collectively promote global greenhouse gas emission reductions in line with international climate targets. This collective commitment is important since climate change is a global challenge that can only be tackled through coordinated efforts. The Principles afford ship financiers an opportunity to significantly contribute to global decarbonisation by aligning their portfolios with the IMO’s 2050 climate targets adopted in April 2018.
Signatories will influence shipping industry practices by integrating climate considerations into lending decisions. Decarbonization will be incentivized through the adoption of a more selective approach to which ships and clients institutions include in their portfolios with responsible shipowners being rewarded with priority access to finance.
Object
The Principles seek to promote responsible environmental stewardship and socially responsible behaviour throughout the maritime value chain by integrating climate considerations into bank portfolios and credit decisions. They are aligned with the initiative of the International Maritime Organization (IMO), the global standard-setting authority for the safety, security and environmental performance of international shipping, to reduce the shipping industry’s annual GHG emissions by at least 50% by 2050 compared with 2008 levels.
Financiers will seek to leverage their collective agency to align their portfolios – and the assets and companies they finance with these climate targets. The Principles reflect a long-term commitment by the its signatories to greener maritime transport and adherence to the highest environmental standards within the shipping industry.
Incorporating climate objectives in future lending decisions will help incentivise shipping industry decarbonisation, rewarding efforts to achieve IMO emission reduction targets with priority access to finance.
The Principles will also help financing institutions manage risks by limiting their exposure to investment in ships which will become undesirable or obsolete in the face of rapidly evolving technology and a shift away from reliance on fossil fuels.
Scope
The Principles apply to lenders, lessors and financial guarantors including export credit agencies which sign onto the initiative. These stakeholders will apply the Principles in business activities where credit is secured by vessel mortgages or finance leases secured by title over vessels falling under the purview of the IMO, including bilateral loans, syndicated loans, club deal and guarantees.
Ships falling within the scope of the Principles are those of 5,000 gross tons and above engaged in international voyages.
Participation
Eleven leading ship finance banks, holding a global shipping loan portfolio of $100 billion (approximately 20% of the global ship finance portfolio) have signed on to the Principles. It is hoped that their large market-share will create a level-playing field where access to finance is conditional on achieving short and long-term emission reductions.
The founding signatories of the Poseidon Principles include:
- ABN Amro;
- Amsterdam Trade Bank;
- Citi;
- Credit Agricole CIB;
- Danish Ship Finance;
- Danske Bank;
- DNB;
- DVB;
- ING;
- Nordea; and
- Société Générale.
Other stakeholders involved in the development of the Principles include shipping law firm Watson Farley& Williams LLP, A.P. Møller Mærsk, Cargill, Euronav, Lloyd’s Register, the Global Maritime Forum, the Rocky Mountain Institute and University College London’s Energy Institute.
Additional financial institutions are expected to join in the near future, notably Asian banks.
Key Principles
The Agreement establishes four key principles to measure climate alignment.
1. Assessment
Signatories will measure the carbon intensity and assess climate alignment of their shipping portfolios on an annual basis in reference to established decarbonisation objectives.
2. Accountability
Signatories will rely exclusively on data types, data sources and services providers identified in the technical guidelines to the principles, namely those approved by the IMO (ex. Classification Societies).
3. Enforcement
Signatories will work with clients and partners to covenant the provision of necessary information to calculate carbon intensity and climate alignment. This will facilitate access to high-quality data.
4. Transparency
Signatories will report the overall climate alignment of its shipping portfolio with supporting information to the secretariat on an annual basis – and to publish the results in relevant institutional reports. Portfolio climate alignment scores will be published annually.
Implementation
The Principles establish a framework for financing institutions to quantitatively assess and disclose the climate alignment of their shipping portfolios with defined climate goals. It establishes a common baseline enabling finance institutions to assess and price climate risk in lending decisions.
This framework will be implemented by signatories through internal policies, procedures and standards applicable to all credit products secured by ships falling under the purview of the IMO, namely vessels of 5,000 gross tons and above engaged in international voyages.
Contractual language has also been developed to incorporate reporting of shipowner emissions in loan agreements and the veracity of submitted data. A standard covenant clause will require the provision of information required to calculate carbon intensity and climate alignment.
The clause will serve as an enforcement mechanism for financing institutions to ensure borrowers provide accurate and appropriate data, while addressing data privacy concerns including consents. The Principles’ signatories will endeavour to include this standard covenant clause in the relevant documentation for all new business activities falling within their scope.
Future Adaptation
In order to ensure their continued relevance and effectiveness, the Principles are intended to evolve through the inclusion of additional further environmental factors such as vessel recycling and other facets where further efforts can be made to global decarbonisation.
They will also adapt to new IMO policies and regulations and support other sustainable initiatives including the Principles for Responsible Banking, Energy Transitions Commission, and the Task Force of Climate-Related Financial Disclosures.