Decarbonization efforts have been trending in the news lately. But for industries like shipping, the attention is primarily on regulators. Why? Shipping and the stakeholders involved are global and out of scope for nation-by-nation policies. The IMO (international marine organization) has stepped in to try and provide a standard for the industry. However, waiting for regulations to come and solve the emissions problem is not only far from realistic but can prove costly to your business. In this blog, we’ll walk through why operating with a carbon-cautious focus can be an imperative practice to accelerate deals, stay ahead of the competition, and protect against losses.
1. Preserving investor relations
In May, a major energy company lost three board members after an activist private equity firm put pressure on the company to meet global efforts to combat climate change. Increasingly, investors are moving in this direction. For example, ESG is a set of standards for a company’s operations that conscious investors are using to screen potential investments. With investor activism on the rise and Biden’s new emphasis on corporate disclosure of climate-linked financial risk, the environmental agenda can no longer be an afterthought.
Banks are applying equally significant pressure. Thanks to the Poseidon Principles, bankers will ask shipowners not only for the financial numbers but also for additional information on emissions. Those that manage to do so will get ahead. And stakes are high. As a result of the pandemic, M&A activity in shipowning has resulted in consolidation. At the same time, freight rates have been going up across the world. With a sudden uptick in demand as economies rebound from the crisis, the supply chain is trying to catch up.
In this highly competitive climate, environmental transparency adds another way for companies to either get ahead or perish. There are already several different programs like the Vancouver port authority’s EcoAction Program, where shipping companies can receive benefits, like discounts off of their harbor dues, by taking voluntary measures to reduce their environmental impact. So whether it’s to accelerate deals, secure finances, or maintain a healthy market value, the environmental factor is there.
2. Protecting your customer base
The environmental agenda is as important to investors in the industry as it is to consumers. Consumers are changing their habits, and it’s impacting the entire supply chain. Last year, Unilever announced each of its products would include a label with the emissions created in the shipment and manufacturing process. As consumers are becoming increasingly concerned about the climate impact of their purchases, cargo owners who can label their modes of transportation as green can have the upper hand. And if shipping companies can provide green alternatives to their customers, they can maximize new business opportunities. But to get there, visibility is a must. The Sea Cargo Charter, for example, provides a robust industry-appropriate methodology and aims to provide a framework for companies to promote transparency and accountability.
Like the refrigerator rating for appliances, cargo owners could also ask for this same kind of visibility. IMO has also been a proponent of this refrigerator rating idea. However, they wouldn’t publish scores – it would be up to shipping companies themselves to do that (EEXI). So is the IMO trying to solve the emissions problem or simply defer responsibility to the industry? If it is the latter, companies need to take matters into their own hands and look beyond the IMO, aiming for best practices as a competitive advantage rather than bare minimum compliance with regulators.
To provide transparency, NAMEPA (North American Marine Environment Protection Association) has launched the first known comprehensive CSR/ESG (Corporate Social Responsibility/Environment, Social, Governance) program designed for the maritime industry. The corresponding MSP (Maritime Sustainability Passport) awards companies, organizations, and individuals who meet the platform’s requirements.
3. Fighting long-term costs
On January 1st 2020, the IMO’s new limit on the sulfur content came into force. This meant that ships had to use fuel oil which was low enough in sulfur, or install appropriate gas cleaning equipment. The result was scrubbers – gas cleaning systems. Although scrubbers proved effective at reducing sulfur dioxide from ship exhaust, previous International Council on Clean Transportation research has shown that using scrubbers results in high amounts of carbon dioxide, particulate matter, and black carbon. In response, IMO published a study but noted that a longer-term understanding was needed to fully assess the environmental impacts. Many countries that are frustrated with IMO’s approach of ‘too little too late’, have adopted national/regional ECAs (Environmental Control Areas) with more stringent requirements – which appears to be the way forward.
Given the potential for harm, some countries have already banned the use of scrubbers in their ports and national waters. So instead of the IMO enabling effective change, the result was not only more damage but more restrictions. Shipping companies driven by sustainability goals and values will have a tough time competing in this uneven market. And we can expect freight markets to get more segmented when market-based measures and the cost of carbon come into play. Without accounting for the complexity of the maritime domain and the many data points that impact emissions, companies will end up with downstream ‘repair work’. As environmental initiatives become increasingly integral in the future of supply chain, industry leaders will need to be one step ahead.