D. Michael Adams
How is Shipping Currently Financed? (Green Shipping Finance Series)
2019 was a watershed year for new initiatives in green shipping - here is the financing landscape... pre-Corona
Climate change is a major threat to operations and profitability in the shipping industry. Intense storms, rising sea levels and changing routes are forcing the industry to understand climate risk and take action. Risks to financial stability will be minimised if the transition begins early and follows a predictable path, thereby helping the market anticipate the transition to a well-below 2ºC world.
A ship has a lifespan of 20-30 years, so meeting the IMO’s 2050 target of at least 50% less GHG means that Zero Emission Ship Technologies (ZEST) must enter the global fleet by 2030. A major deterrent to the transition is the lack of affordable finance.
To understand how shipping is currently financed and the risk exposures of stakeholders, see the table below. Stakeholders include financial institutions, private equity investors, shipowners, operators and charterers. (Source: Issues Paper for Climate Bonds Initiative - Development of Eligibility Criteria, Prepared by UMAS, 2019.)
Bank debt remains the shipping industry’s primary source of funding. Non-bank sources have filled some of the void left by exiting banks since 2008. But capital needs are growing and the case for green finance is strong, along with demand for green investment vehicles by institutional investors. Meanwhile, vessel oversupply becomes more apparent as the twin pressures of trade volatility and regulatory compliance quicken the pace of maritime industry consolidation.
Next week, we will consider the post-Corona picture for shipping's move toward decarbonisation. Will the Corona shock slow progress or give new impetus to public financing of a green transition?