UK & Europe
The implementation of the Poseidon Principles.
In the first article of our three-part series, we examined the Poseidon Principles. In this second article, we consider the implementation of these Principles.
The Third Principle, "the Enforcement Principle", requires that the lender ensures ongoing compliance with the Principles by including a covenant requiring the borrower to provide the necessary information in order for the lender to comply with the Principles. Such covenants, provided by the borrower in favour of the lender, should enable the lender to calculate the carbon intensity of their portfolio and to support the accurate assessment of the portfolio climate alignment.
The information that is required from the borrower should essentially be the same as that provided by the shipowner to the IMO regarding their fleet's performance, in line with the IMO's mandatory Fuel Oil Data Collection System ("DCS"), which requires ships of 5,000 gross tonnage or above, sailing internationally, to collect and report data to an IMO database. Once DCS data is provided to the IMO, it is anonymised. Unless a covenant is included in the facility agreement (or other ancillary documentation), the borrower would be under no obligation to provide such information to the Signatories, and the Signatories would consequently be unable to accurately assess their portfolio climate alignment.
The Poseidon Principles Association (the "Association") have published suggested wording (set out below) for a covenant to be included in the facility agreement in order to achieve compliance. The Association recommends that such clause is included in new loan agreements. (Emphasis has been added by us).
"The [Owner] shall, upon the request of [any Lender] and at the cost of the [Owner], on or before [31st July] in each calendar year, supply or procure the supply to [the Facility Agent] [such Lender] of all information necessary in order for [any Lender] to comply with its obligations under the Poseidon Principles in respect of the preceding year, including, without limitation, all ship fuel oil consumption data required to be collected and reported in accordance with Regulation 22A of Annex VI and any Statement of Compliance, in each case relating to the [Vessel] for the preceding calendar year [provided always that [no Lender] shall publicly disclose such information with the identity of the [Vessel] without the prior written consent of the [Owner]/[.For the avoidance of doubt, such information shall be [“Confidential Information”][“Information”] for the purposes of [Clause [•] (Confidential Information)] [Section [•] (Treatment of Certain Information; Confidentiality)]] but the [Owner] acknowledges that, in accordance with the Poseidon Principles, such information will form part of the information published regarding the [relevant] [Lender’s] portfolio climate alignment."
In effect, the borrower/shipowner (as the case may be) promises to supply all information necessary (either through IMO recognised organisations or directly themselves with the data preferably in the form required by the IMO to reduce the risk of error), in order for the lender to comply with their obligations under the Principles in respect of the previous year. Such information shall be "Confidential Information" for the purpose of Loan Market Association style facility agreements, while at the same time the lender shall have the right to include it as part of the data published regarding the lender's portfolio climate alignment, in accordance with the Principles.
Borrowers and/or shipowners will be concerned with the wide reach of this clause, if left unamended, as "all information necessary" allows the lender to collect a wide range of data. It would be advisable to negotiate a narrower obligation for the borrower/shipowner and to restrict the information that the borrower/shipowner are to provide, only to the information provided to the IMO for the IMO's DCS. Another concern is ensuring that the information that the lender publish is anonymised so that the shipowner cannot be identified by the public. In its standard form, the covenant only allows the lender to publicly disclose information with the identity of the vessel if the borrower/shipowner have given consent for them to do so. This may go some length towards assuaging such concerns, however the clause should be considered on a case by case basis by the borrower/shipowner. The transparency that the Signatories have agreed to, through the Principles, needs to work for the borrowers as well.
The Association notes that the covenant is not intended to be any more burdensome than any of the borrower's other obligations to provide information to the lender periodically under the relevant facility agreement. Further, it is recommended that such covenant should include the grace periods afforded to the borrower in line with the rest of the facility agreement. The borrower should note that if such information is not provided within the timeframe required (including any grace periods), this will constitute a default event under the facility agreement.
In order to facilitate the collection and secure management of the confidential information required from the borrower and lender, and perform the required calculations, commercial solutions are appearing. One such example is LOC Group, the international marine and engineering consulting firm, which is set to launch a digital platform, TRITΩN, aimed at supporting the Signatories to the Principles and their clients by assessing the vessels' carbon performance and the alignment of investment portfolios with the targets set out in the Principles. TRITΩN is said to "enable registrants to navigate their multi-vessel investment portfolios, so they can make informed decisions which are aligned with the values of the Poseidon Principles"1.
By way of update, since our last article, Sumitomo Mitsui Trust Bank (SMTB), a major Japanese shipping lender and one of Japan’s largest asset managers, has become the first Asian financial institution to join the Poseidon Principles2.