Climate risks should not be left unchecked by major shipping banks, UCL research suggests

Climate transition pathways pose risks to the banks that hold $400 billion of global shipping debt, research led by UCL-Energy researchers published today suggests, laying out the first approach to the climate stress-testing of shipping assets.

Navigating Decarbonisation: An approach to evaluate shipping’s risks and opportunities associated with climate change mitigation policy, led by shipping advisory group UMAS and the Carbon War Room (CWR), proposes that enhanced due-diligence undertaken today by financiers, shipowners, and shareholders can help deliver long-term value and avoid losses by the mid-2020s. 

By examining outcomes of investment approaches in a range of future scenarios in the newbuild drybulk fleet (60,000–99,999 dwt), the research assesses whether the industry is exposed to climate policy-driven risks and how to manage these risks. This is the first known scenario analysis of decarbonisation risks in shipping.

Project finance and corporate lending to the international shipping industry has long been big business for major financial institutions. The 18-month project identified that while some financial stakeholders are aware of stranded asset risks, few banks assess ship efficiency or have lending programmes in place to keep assets competitive.

Navigating Decarbonisation is the third instalment of research on stranded assets and climate risk in shipping from CWR and UMAS. It offers a method to analyse how GHG mitigation policies in shipping and national contributions under the Paris Agreement could impact existing and future investments in shipping.

Dr Tristan Smith, Reader in Energy and Shipping at the UCL Energy Institute and Director of UMAS, said:

“Future regulation on shipping GHG is now certain. It’s just the velocity and stringency that remain unknown, and we can handle this by thinking in terms of scenarios. This collaboration between UMAS and Carbon War Room has given us an excellent opportunity to further think about how techno-economic modelling can help to identify risks and opportunities to different scenarios and has given us many ideas for our ongoing work.” 

Jules Kortenhorst, CEO, Carbon War Room and Rocky Mountain Institute said:

“There is clearly a climate leadership vacuum in ship finance. Decarbonisation can still be a win-win on profit and climate for shipping desks, but they will have to be more proactive and live up to the green reputation that many of their institutions hold.

“Financiers should be future-proofing investments and preparing to harness the new opportunities decarbonisation will create. Even with $400 billion in global shipping debt at stake, we have little evidence this is happening. We’ve taken the first step.”

James Mitchell, senior associate for shipping with Carbon War Room, said:

“Risk is nothing new to the shipping industry or to the major financial institutions that bankroll it; however, climate transition risk is. If a newbuild financing decision is made today, that vessel will very probably have to compete under new IMO or EU policy actions before its first drydock. This work suggests that these risks will impact the market and should be considered now.

“We recognise the challenges faced today. Markets are weak, capital requirements are increasing, and compliance with upcoming regulations will require significant capital investment. However, actions taken now by financiers, owners, and shareholders will position both individual assets and the industry as a whole for greater long-term profitability, and will ensure that the first step of decarbonisation is a success. We look forward to working with the industry’s leaders to understand the risks and unlock the opportunities of decarbonisation.”

The key takeaway from the report is for financiers and shipowners to be prepared and thus it is crucial to future-proof assets now and plan for flexibility from the onset, through for example, designing for future retrofits and using innovative financing mechanisms to deal with a variety of future scenarios. Scenario analysis that combines an integrated techno-economic assessment with a number of foreseeable policy scenarios can help navigate future uncertainties and help financiers and shipowners make more informed decisions about their assets.

About UMAS 

UMAS is a sector-focused commercial advisory service that draws upon the world-leading shipping expertise of the UCL Energy Institute, combined with the advisory and management system expertise of MATRANS. In combination, UCLC, UCL Energy Institute, and MATRANS operate under the branding of the entity UMAS. For more details visit the UMAS website.

UMAS undertakes research using models of the shipping system, shipping big data (including satellite Automatic Identification System data), and qualitative and social science analysis of the policy and commercial structure of the shipping system. Research and consultancy is centred on understanding patterns of energy demand in shipping and how this knowledge can be applied to help shipping transition to a low-carbon future. UMAS is world-leading on two key areas; using big data to understand trends and drivers of shipping energy demand or emissions and using models to explore what-ifs for future markets and policies. Read the full report: Navigating Decarbonisation: An approach to evaluate shipping's risks and opportunities associated with climate change mitigation policy

About Carbon War Room

Carbon War Room (CWR) was founded in 2009 as a global nonprofit by Sir Richard Branson and a group of like-minded entrepreneurs. It intervenes in markets to accelerate the adoption of business solutions that reduce carbon emissions at gigaton scale. In 2014, CWR merged with and now operates as part of Rocky Mountain Institute (RMI). RMI engages businesses, communities, institutions, and entrepreneurs to transform global energy use to create a clean, prosperous, and secure low-carbon future. RMI has offices in Basalt and Boulder, Colorado; New York City; Washington, D.C.; and Beijing.

Carbon War Room launched Shipping Efficiency in 2010. Since then, it has worked with RightShip to develop the GHG Emissions Rating and make it publicly available at ShippingEfficiency.org. The Rating ranks vessels against others of a similar type and size on a simple A to G scale, from most to least efficient. It is now used by charterers to shift a fifth of the world’s shipped tonnage to more efficient ships annually and by other shipping stakeholders, including ports and banks. In 2016, it launched BetterFleet, the first publicly available and comprehensive online portal revealing the operational efficiency of ships.