Banks to disclose climate alignment of shipping portfolios with IMO’s strategy of 50% emissions reduction by 2050.
By Paul A. Davies and Michael D. Green
On June 18, 2019, a group of 11 banks — including Citi, Societe Generale, DNB, Citigroup, ABN Amro, and ING — announced the adoption of the Poseidon Principles (PPs). The PPs are accompanied by a framework for integrating climate considerations into shipping investment decisions and for assessing how well a portfolio aligns with the International Maritime Organization’s (IMO’s) Initial Greenhouse Gas Reduction Strategy, which aims to reduce total greenhouse gas (GHG) emissions by at least 50% by 2050 based on 2008 levels. This blog post will explore the four key principles established in the PPs, covering climate alignment, accountability, enforcement, and transparency.
Poseidon Principles Association and Poseidon Principles
The PPs governing body, the Poseidon Principles Association (PPA), was formed on June 18, 2019. The PPA is responsible for the management, administration, and development of the PPs. The PPA is supported by the Rocky Mountain Institute (an independent non-profit organization aiming to accelerate the adoption of a shift to greater efficiency and more use of renewables), the University College London Energy Institute, and Lloyd’s Register. The PPA is committed to improving the role of maritime finance in addressing global environmental issues, spearheaded by the PPs.
The PPs are a voluntary framework for assessing and disclosing the climate alignment of ship finance portfolios. The PPs create a common global baseline to allow financial institutions to align portfolios with responsible environmental impacts, and are applicable to lenders, relevant lessors, and financial guarantors (including export credit agencies) who sign up to the PPs (Signatories). All Signatories must apply the PPs in the following Business Activities:
- Credit products — including bilateral and syndicated loans, club deals, and guarantees secured by vessel mortgages or finance leases secured by title over vessel
- Any vessel or vessels falling under the purview of the IMO — e., vessels of 5,000 gross tonnage and above engaged in international trade
Principle 1 – Assessment of climate alignment
Principle 1 states that Signatories “will annually assess climate alignment in line with the Technical Guidance for all Business Activities.”
This Principle commits Signatories to measure the carbon intensity, and to assess climate alignment, of their shipping portfolios on an annual basis. Climate alignment is defined as “carbon intensity relative to established decarbonization trajectories.”
The decarbonization trajectory must meet the IMO ambition of reducing total annual GHG emissions by at least 50% by 2050 based on 2008 levels. A decarbonization trajectory is a representation of how many grams of CO₂ a single ship can emit to move one ton of goods one nautical mile over a time horizon. The Secretariat of the PPs produces standard decarbonization trajectories for each ship type and size class.
Principle 2 – Accountability
Principle 2 states that the PPs will rely on classification societies and other IMO-recognized organizations and mandatory regulations identified in the Technical Guidance “for the provision of information used to assess and report on climate alignment.”
This Principle commits Signatories, for each step in the assessment of climate alignment, to rely exclusively on the data types, data sources, and service providers identified in the Technical Guidance and established by the IMO. This reliance requires sourcing of data and a Statement of Compliance as required by the IMO Data Collection System (DCS).
The IMO DCS is a data collection system for fuel consumption, in effect from January 1, 2019. The system is mandatory for all ships that are both 5,000 gross tonnage and above and engaged in international trade.
Principle 3 – Enforcement
Principle 3 states that the PPs “will require that ongoing compliance with the PPs is made contractual… using standardized covenant clauses.” The clauses will be reviewed annually.
This Principle is not mandatory, but requires Signatories to agree to work with clients and partners to covenant the provision of necessary information required to calculate carbon intensity and climate alignment. The PPs include a standardized covenant clause covering specific information requirements. This clause will relieve shipowners from the burden of negotiating similar language with every lender.
Principle 4 – Transparency
Principle 4 states that Signatories will publicly acknowledge their status as a Signatory of the PPs, and that Signatories “will publish the results of the portfolio climate alignment score of our Business Activities on an annual basis in line with the Technical Guidance.”
This Principle has three requirements. First, upon becoming a Signatory, the financial institution will publicly acknowledge it is a Signatory of the PPs. Second, on an annual basis and no later than 30 November each year, each Signatory will report the overall climate alignment of its shipping portfolio and supporting information to the Secretariat. Third, each Signatory will publish the overall climate alignment of its shipping portfolio in relevant institutional reports on a timeline appropriate for that Signatory.
According to Dr. Sophie Parker, Principal Consultant at University Maritime Advisory Services, the PPs “are the starting point for pricing in the climate risk of financial institutions’ ship finance portfolios.” Stakeholders hope that integrating climate change considerations into lending decisions will aid risk management and incentivize the decarbonization of maritime shipping.
The IMO Initial GHG Reduction Strategy aims to reduce emissions to at least 50% of 2008 levels by 2050, with a strong emphasis on zero emissions. Following the UK government’s recent commitment to a target of net zero GHG by 2050 (see this prior Latham blog post), a strong emphasis on land and sea GHG reduction toward zero emissions is emerging as green finance initiatives move further into mainstream finance.
Latham & Watkins will continue to monitor developments in this area.
This post was prepared with the assistance of Martin Cassidy in the London office of Latham & Watkins.
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