Sustainable ship loans take off
We cannot stress enough the importance of the oceans for sustaining human life. They produce more than half of the world’s oxygen and absorbs 50 times more carbon dioxide than our atmosphere.
The oceans are also essential to the global economy: 76 percent of US trade involves shipping, and the US ocean economy alone produces $ 282 billion in goods and services. The shipping sector, however, generates around 2.5% of global greenhouse gas emissions, and climate change is driving the Ocean acidification, kill coral reefs and lower ocean oxygen levels. The decarbonization of maritime transport is deeply linked to the preservation of our oceans.
Staff at RMI Center for Climate-Aligned Finance analyzed how financial institutions are helping to shape the decarbonization journey of the maritime sector through the Principles of Poseidon. The Poseidon Principles, the world’s first climate alignment agreement launched in June 2019, constitute a framework for responsible financing of maritime transport. They establish a sturdy frame to quantitatively assess whether the ship financing portfolios of financial institutions are in line with climate goals agreed to by the International Maritime Organization (IMO), the United Nations body that oversees international maritime transport.
Under the Poseidon Principles, signatories commit to assess and disclose the climate alignment of their shipping portfolios and work to align their portfolios with climate goals. Loans linked to Poseidon encourage borrowers (shipowners) to decarbonize their fleet by lowering their interest rate while reducing emissions from their fleet.
Our analysis revealed two key trends. First, although the market for these new sustainability-related maritime loans is emerging, it is growing rapidly. Second, climate alignment agreements like the Poseidon Principles can help financial institutions implement their climate goals.
For example, banks are starting to tackle their net zero target for 2050 by using Poseidon to identify and address issuance hot spots in their loan portfolios. While there is still a lot of work to do, climate-aligned ship financing in the first half of 2021 is on the rise.
A wave of offers
By the end of 2020, 20 banks had signed the Poseidon Principles, and seven more have since joined, including five major Japanese institutions: Sumitomo Mitsui Finance & Leasing in January; Sumitomo Mitsui Banking Corporation in February; Shinsei Bank and MUFG Bank in March; and Development Bank of Japan in May. Standard Chartered was another prominent new signer, joining Poseidon in April. In total, the 27 bank signatories represent approximately $ 185 billion, or roughly half of global ship financing.
As the number of Poseidon signatories grew, so did the scale of the transaction flow. Signatories of Poseidon issued more $ 1.2 billion in the sustainable financing of maritime vessels in 2020. Already in the first half of 2021, banks issued nearly $ 1 billion in Poseidon-related debt, including new types of financial instruments beyond simple loans.
Already in the first half of 2021, banks issued nearly $ 1 billion in Poseidon-linked debt, including new types of financial instruments beyond simple loans.
In March, the owner-operator of a Singaporean oil tanker Hafnia secured a senior secured term loan (SLL) of $ 374 million and a revolving credit facility with a syndicate of 10 banks (see table). Like other Poseidon-related SLLs, the interest rate adjusts each year as the borrower improves its key performance indicators related to emissions. This was Hafnia’s first unionized SLL and ING’s first shipping SLL.
In April, the crude oil transport company headquartered in Antwerp Euronav sealed a $ 95 million revolving credit facility with a syndicate of seven banks. The deal was backed by a loan guarantee from Gigarant.
But the biggest deal of the year so far came in May, when Hong Kong-based Seaspan signed a $ 500 million bond financing of more than 20 institutional investors. The bond transaction – structured as a private placement – proved popular with investors and was the largest U.S. private placement in shipping, according to Seaspan.
The bonds have an average interest rate of 4.1%, and the rate can be adjusted based on the carbon intensity of the fleet as well as Seaspan’s ability to incentivize ship charterers to include provisions related to sustainability in the future. It was notable to see an American bank, Citi, as the sole structuring agent, as European companies largely dominated the sector. Societe Generale was the main coordinator of sustainable development.
Put Poseidon to work
Beyond the flow of transactions, the Poseidon Principles help bankers deepen their engagement with their clients. For example, since the Poseidon Disclosure Framework helps identify the best performing shipowners and / or ship designs, lenders can market products such as retrofit finance to customers who need it most. With the insights gained from disclosure data, financial institutions can also provide technical advisory services to their clients in the shipping industry. Poseidon enriched the dialogue between lenders and maritime borrowers and transformed financial institutions into providers of climate solutions as well as financial solutions.
So it’s no surprise that lenders in other high-emission industries are realizing this, especially in steel and aviation. The center meets six banks develop a climate-aligned financing agreement to support the decarbonization of the steel sector. The banks have formed a working group (led by ING and co-led by Société Générale) to develop a “Poseidon for the financing of steel” with a target launch date of COP26.
The pieces are also falling into place in the aviation sector, with RMI working with major financial players to lay the groundwork for a “Poseidon of aviation finance”, with the aim of launching a task force in the fourth quarter of this year. In addition, RMI and Environmental Defense Fund launched the Alliance of Sustainable Aviation Buyers (SABA) in April. SABA aims to stimulate investment in sustainable aviation fuel and support member engagement in policy making; SABA’s founding members include JPMorgan Chase and Bank of America.
Trends so far in 2021 show that the Poseidon-based debt market continues to grow. We will provide another update in December following the release of the second annual report on the Climate Alignment of Poseidon Principles. Meanwhile, the Poseidon model (assessing and disclosing the climate alignment of high-emission portfolios) is becoming increasingly popular with financial institutions trying to implement their own net zero commitments.
The implementation aspect is crucial: climate alignment agreements like Poseidon help financial institutions take immediate action to decarbonize their portfolios and meet their climate goals. The model is growing in popularity because it sets a clear language of ambition and goal setting, but also supports strong and knowledgeable customer engagement. Poseidon and agreements like this pave the way for financial institutions to move from setting climate goals to achieving them.