In April 2018, the International Maritime Organisation (the "IMO"), took the unprecedented step of committing the shipping industry to a long-term strategy to reduce greenhouse gas emissions from international shipping, and to phase them out as soon as possible this century. Known as "IMO 2050", the strategy aims to reduce total annual greenhouse gas emissions by at least 50% by 2050 compared to 2008, whilst pursuing efforts to phase them out entirely by 2100.
This bold strategy follows Regulation 14.1.3 (the "Regulation") of Annex VI of IMO’s pollution prevention treaty (the "MARPOL Convention") adopted by the IMO in 2016 in response to environmental concerns. The Regulation provides for a 0.5% global cap on the sulphur content of marine fuels compared to the previous limit of 3.5% under Regulation 14.1.2 of the MARPOL Convention ("IMO 2020"). This came into force on 1 January 2020. In itself, IMO 2020 has been described as the most profound regulatory change within the shipping industry. The intention is to significantly reduce the amount of sulphur oxides from ships and to improve environmental well-being and health globally, particularly with regard to coastal populations.
The Poseidon Principles, announced in June 2019, provide a framework agreement aimed at aligning shipping investors with the IMO 2050 requirement. If maritime finance players are willing to pick up the baton to fight for a cleaner shipping industry, the maritime business will be forced to follow.
Under the framework agreement, signatories such as lenders, lessors and financial guarantors will assess the sustainability of vessels within their existing and future shipping portfolios, using an annual efficiency ratio ("AER") of grams of CO2 per ton-mile. The signatories will have to disclose whether their portfolios are in line with the climate goals of the framework agreement. This effectively means, that "bank liquidity will be prioritised for those clients supporting IMO target levels1" which means that shipowners seeking external financing will need to address decarbonisation.
In this first article of a three-part series, we examine the Poseidon Principles. Our second article will consider the implementation of these principles and, in our third article, we will focus on the impact on shipowners.
The Poseidon Principles (the "Principles") are governed by the Poseidon Principles Association, which provides the administration, management and development of the Principles. The Principles are described as "a framework for integrating climate considerations into lending decisions to promote international shipping's decarbonisation.2"
There are four Principles which we consider in detail below: (1) Assessment; (2) Accountability; (3) Enforcement; and (4) Transparency.
In order to calculate the AER, the signatories to the Principles (the "Signatories"), will use the data all shipowners are currently required to submit to the IMO regarding their fleet's performance. The IMO's mandatory Fuel Oil Data Collection System ("DCS") requires ships of 5,000 gross tonnage or above, sailing internationally, to collect and report data to an IMO database. This requirement is part of the IMO's efforts to reduce greenhouse gas emissions from ships. We will look at this in further detail in our second article.
The Principles were developed by three global shipping banks: Citi Bank, Société Générale, and DNB, in collaboration with leading industry players, including A.P. Møller Mærsk, Cargill, Euronav, Gram Car Carriers and Lloyd’s Register.
At the time of writing, 17 leading banks, representing USD 140 billion in shipping finance (about 30% of the global ship finance portfolio) are Signatories to the Poseidon Principles, which means that they are committed to ensuring that their shipping loan portfolios align with the Principles aimed at reducing greenhouse gas emissions.
There are regular press reports of new signatories joining. On 23 January 2020, it was announced that BNP Paribas and Credit Suisse had signed up to the Poseidon Principles, and on 31 January 2020, the first credit insurer (Bpifrance, through its subsidiary Bpifrance Assurance Export, a French credit agency) signed up to the Principles.
There are industry rumours that the Asian financial institutions, led by Chinese lessors, will join the initiative soon. Critics of the initiative are sceptical that without the backing of Chinese lenders, which account for a significant portion of the global ship finance market, the initiative will have credibility.
Under Principle 1, the Signatories commit to "measure the carbon intensity and assess climate alignment of their shipping portfolios on an annual basis"3. The technical guidance provides for different ways to assess climate alignment, however to measure the carbon intensity and climate alignment, the Signatories can only rely on (a) the carbon intensity and climate alignment certificate issued by an IMO recognised organisation and (b) verified IMO DCS data.
Under Principle 2, the Signatories commit to rely exclusively on IMO DCS data and service providers approved by the IMO to calculate their shipping portfolio's climate alignment. This aims to guarantee that the assessment is practical, accurate and fair, and promotes trust in the Poseidon Principles.
Principle 3 provides for an enforcement mechanism to ensure that: (i) the appropriate information is provided by the shipowners to the Signatories; (ii) suitable consents are provided for sharing the information; (iii) privacy policies are in place; and (iv) the information is shared with the Signatories.
Once DCS data is provided to the IMO, it is anonymised. This could be a potential obstacle for the Signatories when assessing the climate alignment of a particular ship, as the shipowners are not obliged to share such specific data with them.
To minimise this obstacle, the Signatories are required to make the compliance requirement and the provision of necessary information to calculate carbon intensity and climate alignment, part of their contractual wording, using standardised covenant clauses.
There is still work to be done by the Signatories in connection with the data sharing, and shipowners are hesitant to agree to provide such personalised and commercial information for fear that such data may become public.
Under Principle 4, each Signatory will publicly acknowledge their status as Signatory, and report the overall climate alignment of their shipping portfolio and supporting information to the Poseidon Principles Secretariat by 30 November each year.
Further, each Signatory will publish, on an annual basis, the overall climate alignment of their shipping portfolio in relevant institutional reports, in accordance with a timeline that is appropriate for that Signatory.
There has been some muted criticism of the Poseidon Principles and questions asked as to whether the Signatories are actually willing to make less money in order to satisfy their environmental, social and governance standards. As part of this, the industry is wondering whether the banks' commitment to the Poseidon Principles is genuine or rather a public relations exercise for the banks to be seen as "greener". However, the Signatories to the Principles are adamant that it is something that is taken very seriously and that actions will speak louder than words, as the Signatories finance more green vessels. On 29 January 2020, it was announced that International Seaways, a New York listed shipowner, closed a series of secured credit facilities worth USD390m in green financing4. The lenders involved are Nordea, ABN AMRO, Credit Agricole, DNB, and SEB. It is said that the financing is consistent with the "decarbonisation trajectory"5 outlined in the Poseidon Principles and that pricing will be linked to the fleet's carbon efficiency to ensure it aligns with the IMO 2050 objectives. But what about smaller shipping companies? Alternative lenders, such as RMK Maritime, who focus on small to medium sized shipowners looking to finance second hand ship acquisitions, and who may have difficulties in attracting the traditional lenders, argue that continuing to use an older vessel can prove more environmentally friendly than scrapping and replacing one6.
The impact of the Principles on shipowners will be examined in our third article.
1 Paul Taylor, Global Head of Shipping & Offshore, Société Générale CIB (quoted in Seatrade Maritime Review "Poseidon Principles for 'responsible' ship lending, Barry Parker).