The shipping sector’s decarbonisation presents a considerable challenge. Maritime transport is a key enabler of global trade and contributes 2%-3% of total global greenhouse gas (GHG) emissions. If shipping were a country, it would be in the world’s top 10 emitters. The main source of emissions is the combustion of fossil fuels. The key to decarbonising the industry lies in alternative, low-carbon fuels. Vessel replacement and retrofitting to adapt to alternative and often more expensive fuels requires significant investments. Alternative fuels, such as methanol, hydrogen and ammonia, are technologically immature and economically unviable. Large-scale adoption of low-carbon fuels is unlikely in the short term and companies face challenges related to technological uncertainty, lack of supporting port infrastructure and stranded asset risk.
Transition and Physical Risks for Opex and Capex
Shipping companies face significant risks due to climate change and the world’s transition to a low-carbon economy. Shipping is the least carbon-intensive mode of freight transport and demand for shipping is expected to remain strong. However, shipping customers are increasingly decarbonising their supply chains, putting pressure on shipping companies to invest in emissions mitigation measures. Regulatory measures to cut emissions and pollution, and improve reporting impose costs on the industry. Physical climate risks, with increased droughts, more frequent and intense extreme weather events and rising sea levels will disrupt shipping and port operations, lead to increased costs and lost revenue, and necessitate adaptation investments.
Transition Plans and Sustainable Finance Underdeveloped
Shipping companies have been slow to issue green or transition bonds or loans to finance emissions reductions and energy efficiency improvements despite the inclusion of shipping in sustainable taxonomies and green finance frameworks. Robust transition plans remain rare across the industry. Net zero by 2050 pledges are common, though most companies lack clear shortand medium-term targets. Credible decarbonisation pathways vary across the industry, depending on the age and composition of a company’s fleet, access to alternative fuels and the necessary port infrastructure. Arobust transition plan is essential for a company to shift its business strategy to ensure continued profitability in a lowcarbon world.
Financing the Transition of Shipping
Labelled Bonds and Loans Still Rare in Shipping Shipping companies have been slow to issue green or transition bonds or sustainability-linked bonds (SLB) to finance emissions reductions, energy efficiency improvements and a shift towards lower-carbon business activities. Since 2018, there have been fewer than 40 issuances in the shipping sector, mostly by APACbased issuers. Sustainability-linked loans (SLL) have been more common and globally spread out over the same timeframe but
remain rare.
For green and transition bonds and green loans issued by shipping companies, energy efficiency, clean transportation, and renewable energy were the most common uses of proceeds in the past five years. SLBs and SLLs were most commonly linked to GHG emissions-related key performance indicators, mostly Scope 1 intensity or absolute reduction targets.
Decarbonisation Pathways Vary Across Industry
Pressure on shipping companies to reduce emissions and transition towards low- and zero-carbon fuels is increasing and in response, a growing number of companies has developed emissions reduction targets. The Science Based Targets initiative has developed maritime sector guidance for setting science-based emissions reduction targets, offering guidance for shipping companies to set credible targets.
Credible emissions reduction targets and a robust transition plan are a useful proxy for investors to understand whether a company has fully incorporated its understanding of climate-related risks and opportunities in its decision-making processes. Given the technological challenges and uncertainties the industry faces and limited option to decarbonise in the short term, investors may struggle to assess the reliability of shipping company’s emissions reduction pledges in the short term.
Net-Zero Pledges Are Increasingly Common
Most of the main companies in the shipping industry have some form of climate-related targets, as shown in the table below. Net
zero by 2050 pledges are increasingly common, though most companies lack clear short- and medium-term targets. Sustainable
Fitch considers such targets as strong indicators for a company’s understanding of transition risks and a necessity for a robust
transition plan for a company to shift its business strategy to ensure continued profitability in a low-carbon world.
The industry is highly fragmented and decarbonisation pathways can vary greatly. Depending on the age of a company’s fleet, management might need to focus on raising capex to replace old, emissions-intensive vessels or to retrofit younger vessels. Access to alternative fuels and the necessary port infrastructure to decarbonise the fleet also depends on a company’s location and routes. Companies servicing routes on green shipping corridors are likely to benefit from the initiative’s efforts to decarbonise shipping.
The decarbonisation of shipping depends heavily on other key stakeholders, such as customer demand for low-carbon shipping (to decarbonise their own supply chains), ports developing the necessary infrastructure to transport and store alternative fuels and policymakers to create regulatory environments supportive of driving forward the necessary technological developments to decarbonise the sector. We expect shipping companies to have strong stakeholder engagement strategies as part of their transition plans in order to manage risks and seize opportunities related to these issues.
Shipping Included in Green Taxonomies and Frameworks
The international nature of shipping adds to the technical net-zero challenge because decarbonisation efforts and regulatory interventions need to be globally coordinated, which is difficult to achieve. Sectoral transition pathways for the shipping industry in specific jurisdictions are rare, though think tanks and international organisations, such as the Transition Pathway Initiative and the Getting to Zero Coalition, have developed sectoral guidance.
Shipping is covered in various ways under the EU taxonomy for sustainable activities. Retrofitting or upgrading vessels to reduce fuel consumption by at least 10%, and financing new vessels that have either zero tailpipe CO2 emissions or (until 2025) that have significantly lower-than-average tailpipe emissions can be classified as environmentally sustainable economic activities.
However, this only applies to vessels that are not dedicated to transporting fossil fuels.
In 2020, the Climate Bonds Initiative developed sector criteria for shipping for determining when projects and assets are compatible with a low carbon, climate resilient economy, and are therefore eligible for certification under the Climate Bonds Standard. Issuers seeking certification have to demonstrate that the vessel’s expected carbon-equivalent intensity is aligned with a decarbonisation trajectory over the lifetime of the bond that reaches zero emissions by 2050. Similar to the EU taxonomy, vessels that are dedicated to transporting fossil fuels (or otherwise support the fossil fuel sector) are excluded from certification.
In 2019, the Poseidon Principles were launched by ship financiers and shipping companies. They provide a framework for integrating climate considerations into lending decisions and assessing the climate alignment of ship finance portfolios. While the principles are voluntary, they can be used by lenders to put pressure on shipping companies to disclose climate-related data and improve carbon intensity performance.
Source: Fitch Ratings