This week we are delighted to welcome Tony Foster, CEO and Chief Investor Officer of Marine Capital, a specialist institutional marine infrastructure asset manager and advisor in debt and equity strategies, in the first of a three part series exploring the crucial role of ESG in the global shipping industry.
The global economy is dependent on shipping (over 85% of all goods are transported by sea) and although the industry is the most efficient form of transportation in terms of CO 2 emitted per ton of cargo moved, it must decarbonise. The industry’s global regulator, the International Maritime Organisation (IMO) has set a mandatory target for the industry to reduce its greenhouse gas emissions to 50% of 2008 levels by 2050 (effectively 80% from current levels, an already ambitious target), while simultaneously pursing efforts to phase out emissions completely. Further tightening of the target (to net zero by 2050) remains possible.
Climate activists may like to see an even more ambitious timeline, but such ambition faces two major obstacles:
- Ships have 25-30-year lifespans on average. US$1 trillion of marine assets can’t simply be removed and replaced; furthermore,
- The technology which is known to be suitable for zero-carbon marine transport (propulsion) is not yet adapted for deep-sea shipping. Such solutions as battery power, fuel cells and biofuel do not work in isolation. Future fuels (such as green ammonia or hydrogen) need not only to be produced in a carbon-free manner and on a huge scale, but would have to be available in the places to which ships trade (i.e. all over the world). These solutions are years away. No one solution will work for all- it will be different depending on the underlying trade and the geography.
A further challenge is the global nature of the industry. Regional initiatives, such as the EU’s Emissions Trading Scheme (ETS) may be problematic when ships trade worldwide and asset owners are domiciled outside the jurisdiction.
In fact, total CO2 output of the global shipping fleet in both absolute terms and as a percentage of global CO2 output has declined since 2008.
“The marine industry is at a critical turning point and the opportunity for investors to shape its environmental impact has never been greater.”
While the technical endgame (i.e., fully decarbonised transport by 2050) looks achievable, the transition remains potentially challenging. Industry bodies such as the Global Maritime Forum and its sub-group, The Getting-to-Zero Coalition, are developing plans to get deep-sea zero-emission vessels (ZEVs) on the water by 2030, in order to address the key challenges outlined above. If those ships are not available and commercially effective by 2030, then the 2050 targets are far less likely to be met.
Meanwhile, numerous technical innovations, ranging from digital (data-driven) performance enhancements, to wind-assisted propulsion systems, ‘air lubrication’ systems etc., will all be involved in reducing fuel consumption and thereby CO2 emission during the transition period. But how will this all be funded?
A carbon (fuel) tax is one route, but the proposition from the International Chamber of Shipping (ICS), a shipowners’ group, of a $2 per ton tax, creating a $5 billion R&D fund for technical innovation is probably not going to pass muster. A significantly higher tax may eventually be pushed through the IMO and it is the consumer who will bear the ultimate cost burden.
Financing the future
Innovative technologies which enhance the performance (and hence fuel efficiency) of vessels struggle to obtain funding, partly due to a general lack of institutional investor interest in this type of VC funding but also because end-users of the vessels (e.g. oil companies, miners, utilities) have been able to enjoy the benefit of these enhancements without funding the costs. Despite the problems with investing in new ‘green marine tech’ such as lack of investment management products (and associated track records) the opportunity set for new marine digital tech alone has been estimated at $105 billion as of today and it is estimated to grow to $278 billion by 2030. There is clearly an opportunity here for investors.
For ships themselves, a group of leading international banks has established the Poseidon Principles, which obliges them to report publicly the performance of the assets in their shipping loan books against the IMO’s decarbonisation pathway. No doubt pressure from their own institutional investors, both generally and specifically, is behind these steps. These Principles will ultimately affect equity investors who should find it increasingly difficult to borrow against inefficient older assets, creating what is hopefully an environmentally virtuous circle. On the other hand, incentives (commercial and regulatory) have to be developed to encourage investment in new clean tech otherwise there is a risk of owners holding onto their existing assets for much longer.
The numbers involved in decarbonisation are big. A study by UMAS estimates that the cumulative investment needed between 2030 and 2050 to meet the current IMO decarbonisation target is US$1 trillion – US$1.4 trillion, or an average of US$50 billion to US$70 billion annually for 20 years. This is on top of the US$0.5 trillion already required by the industry to meet current fleet renewal. If the industry were to fully decarbonise by 2050, this would take the further capital required to US$1.9 trillion. Around 87% of investments needed would be in land-based infrastructure and production facilities for low-carbon fuels with the remaining 13% relating to the marine assets themselves.
This is a massive opportunity for any investor contemplating how to actively support the decarbonisation process, particularly given the essential nature of this industry. The Climate Bond Initiative (CBI) is about to publish its discussion paper which will include a taxonomy for qualifying ship investments, which will certainly assist ESG-focused bond investors. We expect that ships such as crude oil tankers will not qualify; nor, interestingly, will LNG carriers. Issuers will no doubt have to demonstrate ability to comply with a decarbonisation pathway to 2050.
Numerous other assets which aid the broader, global decarbonisation process also fall into the marine space, such as those used to install, service and manage Offshore Wind farms. This, too, is an area needing significant new investment.
The marine industry is undoubtedly at a critical turning point and the opportunity for investors to shape its environmental impact has never been greater.