Recently, a session at Economist Impact’s World Ocean Summit, sponsored by the European Bank for Reconstruction and Development (EBRD), discussed the barriers to investment in greener shipping solutions, how the industry can attract greater private-sector investment, and how developing countries’ needs can be met.
Financing shipping decarbonisation
The shipping industry is essential for global trade and yet also responsible for around 2.5% of greenhouse-gas emissions (GHGs), which could rise by 50-250% by 2050 if shipping is not decarbonised, according to the International Maritime Organisation (IMO)
Despite the IMO strategy, adopted in 2018, to halve annual GHG emissions from shipping by 2050 compared with 2018, and to phase out GHGs as soon as possible this century, progress has been slow, especially in developing countries.
Financing shipping decarbonisation
Overcoming barriers to investment
One of the main barriers to investment in the sector is that vessels are costly and therefore place a large sum on a bank’s balance sheet, according to Alexandre Amedjian, head of shipping finance for Europe, Middle East and the Americas at French investment bank Société Générale.
The market is also highly volatile and cyclical, with no stable cash flows.
“When you mix high levels of debt with instability of cash flows and revenue, that’s usually a combination that financiers do not like, and are very cautious about. Another challenge is that lenders to this sector want security when financing shipbuilding, which is often provided in the form of the vessel itself, similar to a mortgage on a property.”
Alexandre Amedjian, head of shipping finance for Europe, Middle East and the Americas at French investment bank Société Générale
But when it comes to financing the retrofitting of green equipment, no security is available because the vessel is already pledged to the lenders who financed its acquisition. Financing the decarbonisation of existing fleets is probably therefore the biggest challenge of all.
A third factor behind the lack of finance in the sector is the desire of lenders to ensure their investment will last 25 years or more. However, currently there is no consensus on technology for greening the industry, with options including hydrogen, ammonia, methanol and electric batteries. This leads to fears that “a vessel will become obsolete”.
Infrastructure was key to overcoming these barriers to investment, according to Gianpiero Nacci, director and head of climate policy and delivery, industry and infrastructure at the EBRD. An increasing appetite for lower-carbon products was being driven by consumers, manufacturers and regulators, and this was putting pressure on the shipping sector to decarbonise, he explained.
He acknowledged the problems caused by uncertainty over existing technology, but added that without the infrastructure to produce the green hydrogen, ammonia or methanol fuels, the shipping industry would be unlikely to become low carbon. Long-term capital provided by multilateral development banks (MDBs) was needed to finance infrastructure. However, MDBs could not fulfil all the needs, so it was important for the private sector to become involved, he said.
“To bring in the private sector you need long-term offtake agreements to provide cash flow, and also concessional finance from international instruments.”
Gianpiero Nacci, director and head of climate policy and delivery, industry and infrastructure at the EBRD
The EBRD was working with other development agencies as well as the IMO and World Bank to identify concessional finance streams that can create the conditions for investments to take place, he added. Working with early movers who can think long term will in turn create the market dynamics to shift investments.
Financing shipping decarbonisation
Particular challenges for developing countries
Finance is particularly slow to reach developing countries. According to Nancy Karigithu, principal secretary at Kenya’s state department for maritime and shipping affairs, international financing institutions have not yet shown appetite to finance decarbonisation in the shipping sector. Such organisations associate the poorer nations’ shipping industries with negative terms, including high credit, currency risk, cash-flow risk and no return on investment, she added.
“There are also major gaps in capacity, especially in technology, innovation, development and transfer, particularly those related to decarbonisation, and, of course, serious gaps in financing cycles.”
Nancy Karigithu, principal secretary at Kenya’s state department for maritime and shipping affairs
Financing shipping decarbonisation
Source: World Ocean Summit; Ocean economist