Greener Shipping – Jump On The Boat Early

All stakeholders within the shipping industry are facing ever tighter regulations aimed at reducing the environmental impact of their operations. Since 2005 (when the International Maritime Organisation (IMO) issued its first set of regulations under the International Convention for Prevention of Marine Pollution for Ships (MARPOL) to reduce sulphur oxides emissions from ships), regulations on the limitations of sulphur oxides have tightened. The IMO 2020 regulations which have been in force globally since 1 January 2020, introduced further limits; ship owners and operators (SOOs) are now required to reduce their use of fuel oil with sulphur contents above 0.5%. To assist with and reduce the economic impact of compliance with these and other environmental regulations, novel financial packages are now being made available to SOOs. This blog discusses some of these new finance options.

Green Purpose Loans

These types of loan are made available exclusively to finance or to re-finance new or existing green projects. In relation to the shipping industry, this could include providing facilities to finance the retrofitting of specialised equipment to existing vessels such as scrubbers or propeller cap fins. Indeed, in March of this year MARPOL was amended to prohibit the carriage of non-compliant fuel oil on board vessels unless the vessel has an approved "scrubber" system fitted. Alongside the financing of such new equipment required to comply with current regulations, green loans are also available to SOOs who wish to finance the acquisition of new 'greener' vessels such as LNG-fuelled ships.

Sustainability-Linked Loans

These loans are linked to sustainability performance targets for a borrower such that if the relevant targets are met, the rate of interest on the loan will correspondingly decrease; an attractive option to SOOs. Sustainability loans may be more suitable where the use of proceeds are not to be allocated exclusively to green projects or where the use of the proceeds of the loan is not necessarily known. In relation to the shipping industry, such facilities could be provided to SOOs where cash injection is required for them to comply with new environmental regulations; for purchasing more eco-friendly fuel; diversifying their business activities or for R&D purposes, in each case, either singularly or in combination with general corporate purposes.

European Investment Bank & The Poseidon Principles

To encourage the European based SOO's implementation of greener technologies within the shipping industry, the European Investment Bank launched a 750 million euros shipping guarantee programme in 2016 for the purpose of cleaning up the shipping industry by supporting the financing of new, greener vessels as well as environmentally friendly retrofitting of existing vessels.

Recently, we wrote about the new Poseidon Principles, which set an international framework for lenders to disclose the climate alignment of their ship finance portfolios with international environmental goals. This will likely prompt lenders to diversify their marine finance portfolios to be less carbon-intensive and to leave little choice but for SOOs to align with these principles and the corresponding lending terms offered by signatory lenders.

Why Get Onboard Early?

The cost of complying with newer environmental regulation is likely to be more onerous should SOOs delay in embracing more environmentally friendly practices. For example, a new levy has been proposed on carbon-intensive shipping fuels based on a pre-determined IMO benchmark. Early consultations show this will range from $250-$300 per tonne of CO2 based on the use of fuel with a CO2 level above the agreed standard.

Therefore, whether a particular SOO can afford to diversify their existing vessel portfolio or not, it is recommended that such changes to their business practices are implemented sooner rather than later, as stricter environmental regulations are on the horizon for those who continue to operate under conventional, environmentally damaging practices.

If you would like to discuss any of the finance packages mentioned in this blog, please contact Neal Richardson or Hannah Sinclair.

Download our guide to green finance