Shipping and ESG: sailing through a minefield

WHEN talking recently to a senior executive in a major London-based investment fund manager, the initials ESG came up in almost every sentence.

They stand, of course, for Environmental, Social, Governance, and have become very important criteria for investors and very often the subject of heated debate at annual general meetings of shareholders.

The relevance of the E in ESG to the global shipping industry has long been blindingly obvious. Those within the industry will be aware of the huge amount of time and effort shipping has put into environmental protection, how much it has had to adapt and how much more needs to be done.

To almost everybody else shipping is at best a mystery. Most of the media attention it receives is adverse and it is easy to push a narrative that it is a dirty, polluting industry that poses a massive threat to environment.

That was broadly the message green activists attempted to highlight when they carried out a recent stunt which involved pouring thick black oil onto the pavement in front of the headquarters of the International Maritime Organization (IMO).

Swaying opinion

Of course, extreme actions like this don't directly affect the decisions of investors. But they do play into a pitch which can also use incidents such as the one involving the container ship Ever Given last year, to sway public and investors opinions.

And noisy interventions by a tiny minority of activists can make companies and investors nervous.

In fact, many shipping companies have gone a long way already, to an extent in response to increasing pressure on and from the owners of cargo, the shippers. Perhaps the most notable example of this is that shipping conglomerate AP Moller-Maersk says it plans to achieve net zero greenhouse gas emissions in 2040, a decade ahead of its initial 2050 ambition.

The company's chief executive officer Soren Skou explained: "As a global provider of end-to-end logistics services across all transport modes, it is a strategic imperative for Maersk to extend our net zero ambition to the total footprint of the business. The science is clear, we must act now to deliver significant progress in this decade.

"These very ambitious targets mark our commitment to society and to the many customers who call for net zero supply chains."

It is significant that he mentioned customer pressure for decarbonisation.

The big lenders are also now becoming ESG-minded. OCBC Bank has recently provided a US$70 million sustainability-linked loan with U-Ming Marine Transport Corporation, one of Taiwan's largest listed bulk carrier companies. The loan will be used to fund U-Ming's fleet renewal plan which includes the construction of two new 210,000dwt bulk carriers in China. It was structured so that U-Ming will see interest rate reductions if it meets pre-agreed targets in two areas, a reduction in emission intensity and an annual increase in the proportion of U-Ming's fleet which obtains a satisfactory emissions rating from third party maritime due-diligence organisation RightShip.

Ms Elaine Lam, OCBC Bank's Head of Global Corporate Banking, said: "Interest in the decarbonisation of shipping has been gaining momentum as the world acts towards achieving net-zero by 2050. This sustainability-linked loan with U-Ming is pegged to clear emissions targets that will help realise this vision, and it demonstrates OCBC's commitment as a signatory to the Poseidon Principles.

"As a leading bank in the region for sustainable financing, we are proud to support a like-minded customer such as U-Ming in its fleet renewal and decarbonisation plans."

Launched in 2019, the Poseidon Principles are an initiative by the banking community aimed at reducing the greenhouse gas (GHG) emissions of their shipping portfolios and aimed at decarbonisation of the shipping industry.

Reducing or eliminating the GHG emissions of ships will be welcomed by the environmental lobby but they will still want more.

Among recent press releases coming across my desk were approvals in principle for designs of a very large coal carrier and very large crude oil carrier. Both could be described as "green" as they incorporated advanced measures to cut GHG.

The environmental lobby will point to the cargoes to be carried and say we shouldn't be building such ships at all.

Challenging element

The E in ESG could be challenging, especially if various forms of carbon capture promise to be a practical way of achieving net zero. The environmental lobby would do everything possible to prevent continued reliance of fossil fuels, including LNG which they dislike at least as much as oil and coal.

But what about the S and the G? Social and governance issues do not seem to be particularly prominent in the minds of investment fund managers yet when it comes to things maritime.

There will be many who would prefer it stays like that. On the other hand, no doubt the International Transport Workers Federation (ITF) would be very happy to see shareholder groups asking nosey questions about pay and welfare issues, perhaps including fatigue and manning levels.

And then there is governance. The idea of transparency of ownership and a searching look at the open registry system could come as a shock to some, but certainly not all, parts of the industry.

For shipping, ESG is rather like opening Pandora's box. You can't put those principles back where they came from. They are part of the new reality.

ESG is bound to make navigating the future more difficult, possibly for some rather akin to sailing through a minefield.