The Poseidon Principles and their implications in Ship Finance

The Poseidon Principles (Principles) were launched on 18 June 2019 and were developed in response to the need of a global framework for responsible ship finance. The framework is designed to encourage financial institutions to include climate considerations in their lending decisions and to align their ship finance portfolios with responsible environmental behaviour and incentivise international shipping's decarbonisation in line with the climate goals of the International Maritime Organisation (IMO).

The IMO is the United Nations specialised agency with responsibility for the safety and security of shipping and the prevention of marine and atmospheric pollution by ships. The Principles follow the IMO's goals announced in their Initial Greenhouse Gas (GHG) Strategy in April 2018 to reduce GHG emissions produced by shipping by at least 50% by 2050 (with 2008's emissions as the baseline).

The Principles

There are four principles:

Assessment of Climate Alignment: each signatory to the Principles has agreed by its accession to them, to take an annual measurement of the carbon intensity of their shipping portfolios and to assess the extent to which it aligns with the decarbonisation trajectory set out by the IMO. The trajectory being that which aims to meet the IMO's reduction of GHG referred to above.

Accountability: in order to ensure a level playing field amongst the signatories to the Principles, the information which is provided by them to satisfy the principle of Assessment of Climate Alignment relies solely on data types, sources and service providers established and identified by the IMO's Fuel Oil Data Collection Service (DCS). The DCS is mandatory for ships of 5,000 gross tonnage and above and which operate internationally. The DCS requires owners to collect consumption data of each type of fuel oil they use. The data is then reported to the flag state at the end of each calendar year by the vessel owners and the flag state is required to transfer this data to the IMO. Only when a flag state has determined that the data has been reported in accordance with the IMO requirements will it issue the ship with its Statement of Compliance.

Enforcement: obviously, for the Principles to deliver their intended purpose, there needs to be an equilibrium of obligations on those who are signatories. It is hoped that this will be aided by the inclusion in finance documentation of a standardised covenant clause (Standardised Covenant). The text of the Standardised Covenant is set out in the Principles and requires shipowners/operators to provide certain data to their financiers relating to (amongst other things) their vessels' fuel consumption to enable the calculation of carbon intensity. This information is in line with what is to be provided to the DCS but whilst the provision of that information is mandatory, it is anonymised once provided to the IMO hence, the requirement for the covenant.

The inclusion of the Standardised Covenant is not compulsory by the signatories to the Principles in their financing documentation, but they are strongly recommended to include it.

Transparency: upon becoming a signatory to the Principles, the relevant signatory will publicly acknowledge that it is a signatory to them. In terms of reporting requirements, the first stage of the process commences in May of the second calendar year after a party becomes a signatory (and repeats every May thereafter). Once the relevant data becomes available through the DCS, signatories will collect the data from their shipowners and proceed to calculate the carbon intensity of vessels in their portfolio in order to assess the climate alignment at portfolio level. The portfolio climate alignment scores are then reported by 30 November with their publication by the Poseidon Principles Association occurring by 31 December of each year.

Who has signed up to the Principles?

The Principles were developed by a drafting group led by global shipping banks which included Citi, Société Générale and DnB in collaboration with (amongst others) major shipowners and operators including A.P Moller Maersk and Euronav. The original signatories to the Principles were Citi, DnB, Société Générale, ABN AMRO, Amsterdam Trade Bank, Crédit Agricole CIB, Danish Ship Finance, Danske Bank, DVB, ING and Nordea. Since 2019 seven further banks have become signatories and it is expected that others will quickly follow suit to include additional lenders, lessors and financial guarantors (including ECAs).

Is adhering to the Principles burdensome?

It needn't be. A key aim of the drafters of the Principles was to make the adherence to them by the signatories and their customers simple and efficient. The inclusion of the Standardised Covenant (which originated as a request from shipowners to ease the negotiation and reporting burden across their facilities) is a key element in achieving this goal.

Within the Standardised Covenant there is an option for a ship owner to supply a Carbon Intensity and Climate Alignment Certificate. The provision of this certificate would reduce the burden on the financial institution to collate and calculate the relevant data itself, and should in turn, reduce the disclosure burden on the shipowner. However, as these certificates need to be produced by an IMO-recognised organisation, a fee may be required for their issuance and there may well be push back for the inclusion of this option if the shipowner is expected to bear the cost itself.

Even without the Standardised Covenant, however, this required information is the same information which must be supplied to the DCS. This should mean that owners find this disclosure requirement relatively simple to achieve especially when compared to some of the reporting and disclosure requirements relating to other vessel information that can often be found in finance documentation.

Are more parties likely to sign up to the Principles?

In our view, yes. It seems likely that prospective signatories will deem the Principles as a necessary part of their businesses having little day-to-day negative impact on their clients and their operations. Indeed, as more financial institutions, lessors, and financial guarantors become signatories to the Principles, shipowners who do not wish to align with the Principles, may find that they have little choice but to do so as greater numbers of lenders choose to become signatories.

Furthermore, as accession to the Principles allows lenders a means by which they can negate the financial risk and regulatory uncertainty of regulations applicable to the shipping industry developing faster than expected, there is possibly the potential for such negation to be passed on to shipowners in the form of reduced pricing in the future.