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 President Biden’s new emphasis on the importance of corporate disclosure of climate-linked financial risk, the environmental agenda can no longer be an afterthought as a way to protect cash flow.
Banks are applying equally significant pressure. Thanks to the Poseidon Principles, bankers will ask shipowners not only for the financial numbers but also for the additional technical information needed to estimate the GHG 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 to take advantage of economies of scale for survival. 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 shipping and energy 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 companies not just in the products they need to sell but for their entire supply chain. Last year, Unilever announced each of its 70,000 products would include a label with the greenhouse gas 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 have stated that they wouldn’t publish scores, and it would be up to individual 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 to maximize their growth 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 specifically for the maritime industry. The corresponding MSP (Maritime Sustainability Passport) awards companies, organizations and individuals who meet the platform’s requirements. In January of this year, NAMEPA awarded MSC Mediterranean Shipping Company, the (MSP) Certificate and Seal. With about a 16% market share, MSC set an important example of how industry leaders are already moving in the right direction.
3. Fighting long-term costs
On January 1st 2020, the IMO’s new limit on the sulfur content in the fuel oil used by ships 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 it was limited in time and that a longer-term understanding was needed to fully assess the environmental impacts. Many countries and regions that seem frustrated with IMO’s approach of ‘too little too late’, have adopted national/regional ECAs (Environmental Control Areas) with much more stringent requirements, which appears to be the way forward.
Given the potential for harm, some countries have already taken preventive measures and banned the use of scrubbers in their ports and national waters. So instead of the IMO enabling shipping companies with data-driven decisions to effectively mitigate environmental risk, 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 the shipping freight markets to get more segmented when market-based measures and the cost of carbon come into play. Without access to data that accounts for the complexity of the maritime domain and the many factors that impact vessel emissions, companies will end up with a downstream of ‘repair work’ down the line. As environmental initiatives become increasingly integral in the future of supply chain, industry leaders will need to be one step ahead.