Banks can help global shipping face energy transition issues

Shipping is the backbone of international trade, responsible for 90 per cent of world commerce. Over 100,000 vessels contribute to 3 per cent of global greenhouse gas emissions annually. While other industries such as power generation may be more emissions-heavy, as world trade grows, emissions from shipping will only become more intense. These emissions are set to increase by between 50 and 250 per cent by 2050 - unless ambitious decarbonisation efforts take place.

The industry's goal, set by the International Maritime Organization (IMO), is to at least halve greenhouse gas emissions by the year 2050. The challenge for international shipping, as the International Energy Agency puts it, is that policies are needed to encourage the adoption of low- and zero-carbon fuels and technologies for oceangoing vessels. This means that despite efforts and ambitions from industry players, until there are commercially viable zero-carbon fuels and infrastructure for long-haul voyages, options are limited for shipping companies.

Like many other industries, there is a need for an 'all hands on deck' approach so that the maritime industry's decarbonisation goals can be met.

Funding emissions reductions through sustainable finance

As an important regional maritime hub, Singapore has a critical role to play. Transport Minister S Iswaran announced on Mar 9 that S$300 million will be invested into programmes under a new blueprint, which has key aims including achieving net-zero emissions at all port terminals by 2050.

Large corporates across the value chain are intent on meaningful action. Shippers like Amazon, IKEA and Unilever have committed to switch to vessels powered by zero-carbon fuels by 2040, while Danish shipping giant Maersk has committed to become carbon neutral by 2050 and has announced its first-ever dual-fuel, carbon neutral vessel that can also run on green methanol.

It goes without saying that such ambitions require funding and as more ship owners and operators come under pressure to meet the IMO's 2050 targets, banking institutions and financiers have stepped up partnerships with clients in their decarbonisation efforts. Sustainable financing, especially sustainability-linked or transition loans, are designed to link shippers' decarbonisation trajectories with financing prices, offering further incentives for companies to deliver what they have committed to achieving.

U-Ming Marine Transport Corporation, one of Taiwan's largest listed bulk carrier companies, recently worked with OCBC Bank to fund its fleet renewal plan which includes the construction of 2 new 210,000dwt bulk carriers in China. Under the deal structure, U-Ming will enjoy interest rate reductions if it meets pre-agreed targets in 2 areas, reduction in its fleet's carbon emission intensity, and if the company achieves an annual increase in proportion of its fleet obtaining satisfactory emissions ratings from a third-party maritime due-diligence organisation.

Companies needing to gain operational efficiency while cutting emissions as soon as possible also look towards retrofitting their existing ships. Such retrofits emit as much as 97 per cent less carbon during construction and can take just 2 months to complete.

To reduce emissions by 20 per cent, BW LPG (the Oslo-listed owner of the world's largest fleet of Very Large Gas Carriers) is retrofitting existing vessels with dual-fuel propulsion technology. Like many in the maritime industry, the company is serious about cutting emissions, and is aligned with the IMO's targets. OCBC acted as sole adviser for BW LPG's first transition loan and to finance several of the vessels being retrofitted, also helped develop BW LPG's transition financing framework.

Frameworks that lead to discussion - and action

Understanding our clients and their goals is what all financiers strive for. Being a signatory to the Poseidon Principles provides that avenue to strengthening the partnership between lender and client.

OCBC was the first South-east Asian bank to become a signatory to the Poseidon Principles in December 2021. Launched in 2019, the Poseidon Principles provide a global framework for assessing, disclosing and measuring the climate alignment of financial institutions' shipping loan portfolios against the adopted climate goals by the IMO.

The bank's move has led to a deeper understanding of clients' emission profiles and their aspirations, as well as challenges on climate action that clients are working to manage. Such insights enable the bank to structure relevant sustainable financing solutions, since many shipping clients are attempting even bolder action than what the IMO requires in developing transparent and time-bound decarbonisation roadmaps.

As availability and access to capital is imperative for clients to invest in new technologies and operational models, financiers must continue to facilitate the shift and adoption of truly sustainable solutions by the shipping ecosystem in order to achieve a reduction in carbon intensity of international shipping.

The writer is OCBC Bank's head of global corporate banking

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