What is ESG?
ESG is a general term that stands for environmental, social, and governance. A company with a high ESG score typically invests resources that positively impact its surroundings. Understanding exactly what ESG is can have a significant effect on a company. Even though it may not appear on financial reports, it creates accountability for the company’s impact on the environment. In the maritime industry, ESG examples include leaving a smaller carbon footprint and utilizing greener solutions.
The idea of an ESG rating was first introduced in 2005 and has become a significant factor for investors. According to data from Refinitiv Lipper, ESG funding in the U.S. alone was more than $649 billion in 2021. This was a significant increase from the $285 billion that was raised in 2019.
What is an ESG score?
ESG scores provide an objective measurement of how well a company is performing with respect to its ESG practices. They typically show the degree to which the company is operating in a sustainable manner. These scores are generated by rating platforms and are based on corporate disclosures, interviews with management, and publicly available information.
How ESG impacts the shipping industry
In the shipping and maritime industries, the ESG environmental factors include the following:
- Greenhouse gas emissions (GHG)
- Pollutants to ocean
- Ecological impact
The ESG standards for social awareness focus on the mental health and well-being of employees on the ship, dock, and others that are involved in the shipping process. A few examples include:
- Business ethics
- Employee health
- Accident and safety management
ESG metrics are evaluated and compiled into sustainability reports to ensure the company maintains its ESG standards. The reports are shared with primary stakeholders to create transparency around these essential issues. It also confirms that the company meets ESG regulations and has policies, initiatives, and strategies in place to reduce ESG risk, and increase ESG ratings.
Why ESG is important?
Once you understand what ESG is, it’s easy to see its importance, especially in the maritime industry. Currently, the shipping transportation industry is the cause of nearly 3% of greenhouse gas (GHG) emissions per year. Enacting policies to reduce these emissions will have a major impact on the environment and the health of maritime life. To accomplish this goal, the United Nations International Maritime Organization (IMO) created an ESG strategy to reduce the carbon intensity from international shippers over the next few decades.
The KPIs are based on the levels measured in 2008:
- Reduce carbon intensity levels by up to 40% by 2030
- Reduce carbon intensity levels by up to 70% by 2050
- A plan to reduce the total annual GHG emissions by as much as 50% by 2050.
The European Union’s decision to include shipping to its carbon market for the first time has renewed focus on maritime decarbonization and fuel consumption. By 2024, shippers will be required to purchase EU carbon permits to cover 40% of their emissions, elevating to 70% in 2025, and 100% by 2026. And this is obviously a global challenge.
To reach the aforementioned goals, new ESG regulations are being implemented that require shipping companies to measure and report on their carbon intensity indicator and energy efficiency.
ESG & the maritime industry
Illegal, unreported, and unregulated (IUU) fishing is an example of an unethical supply chain. In addition to fishing illegally, the ecosystem surrounding IUU is flush with forced labor, human trafficking, and ecological abuses.
IUU fishing typically takes place just beyond Exclusive Economic ones (EEZ), meaning vessels arebeyond the jurisdiction of any national body. Supplies and discharge of these boats’ catches are delivered through ship-to-ship exchanges, allowing ships to remain at sea for months at a time.
For ship owners committed to ESG practices, preventing IUU abuses is a critical part of maintaining an ethical supply chain. Shipping stakeholders are monitoring fishing and support fleets. This includes an extended due diligence process, mitigating risk, and understanding the actors with whom they are doing business.
Fuel consumption is another area where ESG comes into play. On the path to decarbonization, maritime companies should be more transparent about their fuel consumption, allowing stakeholders to make informed ESG-based decisions when working with a shipping company.
What is ESG greenwashing?
ESG greenwashing attempts to mislead investors and the public regarding a company’s environmental and social policies. Instead of releasing honest reports, some companies release reports with partial data, or unsubstantiated claims about ESG environmental factors to improve their ESG rating.
Another technique used by some companies is to boast about a minor feature or function of their services that meet ESG regulations, while covering up practices or involvement in actions that harm the environment, or negative social aspects of the company.
ESG best practices
There are a number of ESG best practices companies can adopt into their everyday work. These include:
- Invite third-party auditors to inspect products and services
- Have a team or committee that is focused and dedicated to ESG issues
- Ensure that ESG strategies are discussed in meetings with upper management
- Routine training with relevant stakeholders to discuss key ESG environmental factors and how to improve them within the company
- Create a company culture that believes in the importance of a good ESG score
- Transparent ESG reporting
More specifically for maritime, shippers and others in the maritime ecosystem can consider an artificial intelligence solution that tracks fuel consumption, as part of a decarbonization initiative. They can also join a forum of like-minded organizations to share challenges and best practices.
ESG services help create a better work environment
In addition to improving the environment, preserving sea life, and lowering the carbon footprint of shipping vessels, ESG plays an important role in the future of the shipping industry. According to the Global Maritime Forum in 2021, one of the top challenges facing the maritime industry is workforce and shortage issues. To help combat this issue, maritime companies should do their best to ensure that they create a safe and supportive work environment for all employees.