Momentum is gaining in linking the monitoring and reporting of ESG performance to shipping finance

Increased regulatory requirements and market trends around sustainability and the environment have been impacting shipping companies for many years and new requirements continue to be introduced, such as the IMO 2050 target for the reduction of GHG emissions by 50% compared to 2008 levels. The recent trends in sustainability, or Environmental, Social and Governance (ESG) performance, are now impacting the decisions of investors in the capital market and the ability of shipping companies to access financing.

Investors and banks are now trying to understand how ESG and other non-financial measures are shaping the company's strategy, operations and long-term prospects.

In PwC, being close to the shipping industry and listening to our clients’ concerns, has helped us to conclude on five key trends that we consider are driving the need for additional information: 

 

The complex and continuously changing maritime environmental regulations

 

Shipping companies are required to comply with multiple and continuously changing environmental regulations, which highly affect their operations. The IMO 2020, water ballast treatment, inventory of hazardous materials, the IMO DCS and EU MRV are just some examples of recent or upcoming maritime specific environmental regulations. In order to be able to comply, shipping companies are called to develop processes that will help them monitor their environmental performance and form action plans in order to mitigate their impact. But more importantly, the majority of these regulations require a significant investment in capital expenditures, that will allow the maritime industry to comply either in the short, medium or long-term. 

The regulatory environment  became even more complex with the announcement of the IMO 2050 strategy for 50% GHG emission reduction. This is a target driven strategy, which cannot be supported by the current technology related to on-board fuel consumption. According to some sources, it is estimated that an investment of approximately $1 trillion will be needed in order to finance the required transition, including R&D, testing of new technologies, modification of existing vessels, design and construction of new buildings and development of land infrastructure that will support refuelling of the new fuel types. This creates a strategy gap for shipping companies and a significant transition risk for the industry, that increases investor uncertainty.  

 

 

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Linking ESG factors to risk management

 

Investors now consider that ESG performance is highly correlated to creditor risk. Issues such as protection of the marine environment, climate change impacts, crew welfare and well being, improvement of the seagoing experience and life on board the vessel, application of high health and safety standards and minimization of incidents ratios, business ethics and transparency regarding the corporate structure (relationship between holding, management and ship-owning companies), anti-bribery and anti-corruption practices, can highly affect the operations of the vessel and the long-term sustainable growth of the company.

ESG performance is now correlated to traditional shipping industry risks, including accidents, vessel detentions, pollution incidents and financial loss due to fines or reputational damage. It is also linked to new emerging risks related to corporate governance and social factors, that define how sustainable the business is and the companies ability to access financing. As a result, investors now look to integrate ESG related risk factors in their investment processes just like any other risk factor. This has led to the development of ESG ratings, performed by agencies, who rank the ESG performance of targeted companies, based mainly on publicly available information. Multiple investor types (financial institutions, insurance companies, asset managers, funds, private equities) now have access and consider these risk ratings in their decision-making process.

 

 

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Linking ESG performance to resilience during a crisis period

Investors are now trying to target a new and different generation of entities that focus on ESG performance and directly link ESG to their long-term sustainable development and growth. This perception has only been strengthened during the COVID-19 crisis. A recent HSBC analysis showed that companies with high ESG ratings were more resilient to the economic shock caused by Covid-19 lockdowns. Although global stock markets have experienced a significant downturn, stocks of companies with a strong ESG performance outperformed the market throughout April 2020. This trend was noticed in most global markets, and was particularly strong in the Asia-Pacific region, where ESG companies outperformed the market by approximately 15%. In Europe, the corresponding performance gains were approximately 7%.

 

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Linking ESG performance to shipping finance: A game changer

 

Until now, disclosure of ESG performance takes place on a voluntary basis for shipping companies.  However, recent initiatives and regulations are expected to establish a direct link of financing terms with ESG performance in the maritime industry and the following key drivers are expected to  accelerate this change in the shipping industry:

The Poseidon principles

The Poseidon principles is an initiative signed by leading banks and shipping finance providers, that introduces a framework for assessing and disclosing the climate alignment of ship finance portfolios. The main purpose is to incentivize international decarbonization of the industry, requiring shipping companies to monitor and report their environmental performance.

The EU sustainable finance regulation

Sustainable Finance is part of the EU green deal, which aims to achieve climate neutrality in the EU by 2050. The regulation requires investors to monitor and report on the ESG performance of their portfolio companies. The annual credit rating of financial institutions and as a result their ability to raise finance will be linked to the ESG performance of their portfolio companies. 

Sustainable shipping finance products and lending terms

Sustainable finance products relate to financial products that integrate environmental, social and governance (ESG) criteria into the business or investment decisions. Examples of recent relevant financing programs include green finance credit facilities to finance LNG powered vessels, green retrofit programs and green bonds issued by shipping companies.

 

 

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ESG Reporting Trends

 

It is becoming clearer that public disclosure of ESG performance will soon be mainstream in the maritime industry and the ESG reporting will be specific to the maritime industry. Shipping companies will need to be prepared to timely collect and report relevant data. As a trend, we see shipping companies moving away from the collection and reporting of large amounts of mixed data, to a more focused mindset of treating ESG data as an asset for performance management for insights and strategy formulation and then for delivering targeted messaging to key stakeholders.

There are certain key enablers which can accelerate the development of an impactful ESG report in the maritime industry: 

Reports tailored to maritime industry

A shipping ESG report should reflect maritime specific topics. Applicable sustainability standards (GRI, SASB, etc.) usually form the basis for preparing relevant information, however the content should be further enhanced in order to reflect the industry challenges and opportunities. In order to do so, a key parameter is to understand the various stakeholder groups of the shipping industry and their expectations. Moreover, the reports should reflect the ESG strategic action plans that address key industry challenges, such as the IMO transition strategy.

It is not just the Environment, don’t forget about the “S and “G”

Although environmental performance plays a significant role in the overall ESG rating, the other two pillars, social and governance, are equally important. Shipping companies can usually demonstrate high performance records with regards to their social and governance aspects of operations, as long as they identify the correct metrics and data associated with these pillars. It is common that high “S” and “G” performance can offset potential poor environmental performance of shipping companies. 

Digitalize ESG performance monitoring

Technology is the big enabler here. Application of vessel performance management systems, using sensors on board the vessels and BI tools at the office in order to collect and monitor relevant data is not new to the shipping industry. The link of the respective data with the ESG specific KPIs enables companies to have timely information on their ESG performance on a per vessel basis. Companies that apply such solutions can improve their vessels performance and at the same time improve their ESG performance and automate their reporting process, creating modern digitalized and user friendly reports, highly differentiated from the traditional sustainability reporting.

 

 

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Recent PwC insights have flagged that today, ESG is one of the most important topics on the Board agenda. Key stakeholders, such as investors, banks and charterers, will soon expect that ESG reporting will be part of a shipping company’s ongoing reporting and will drive the basis of their relationship with the company.  The next crucial step is to build an ESG strategy, driven by key executives and the Board of Directors, that will provide for impactful ESG reporting and the best time to take this step is now.

Contact us

Socrates Leptos-Bourgi

Assurance Partner, Global Shipping & Ports Leader, PwC Greece

Tel: +30 210 6874630

Kostas Perris

Advisory Partner, PwC Greece

Tel: +30 210 6874002

Agis Moschovakos

Tax Partner, PwC Greece

Tel: +30 210 6874544

Santos Equitz

Managing Director, Capital Markets Leader, Shipping Industry Leader, PwC Greece

Tel: +30 210 6874574, Mob:+30 694 1581 785

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