It’s the moment climate finance professionals live for: when an idea — an initiative — is turned into real-world action by real-world actors. A year after the Poseidon Principles were signed, 15 banking signatories last month disclosed their ship loan portfolios’ climate alignment scores for 2019.
The release of the inaugural "Poseidon Principles Climate Alignment Report" allows us to reflect on the progress the financial sector has catalyzed in the global shipping sector in 2020. First, banks leveraged the principles to engage existing clients and close over $1 billion in Poseidon-linked loan facilities. Additionally, 17 leading ship charterers signed the Poseidon-inspired Sea Cargo Charter for charterers to assess and disclose climate alignment. Finally, the Climate Bonds Initiative defined how shipping projects contribute to climate change mitigation through the Shipping Criteria of the International Climate Bonds Standard (CBS).
But the impacts go beyond shipping. The signals from the ship finance community demonstrate how financial institutions can lead sector-wide decarbonization efforts in other high-emitting industries.
A successful first year
The Poseidon Principles, launched in June 2019, are a framework for responsible maritime shipping finance. They establish a robust framework for quantitatively assessing whether financial institutions’ ship finance portfolios are in line with the climate targets agreed by the International Maritime Organization (IMO), the United Nations body that oversees international shipping. Under the Poseidon Principles, signatories commit to assess and disclose the climate alignment of their shipping portfolios and work to bring their portfolios in line with climate targets.
In the "2020 Poseidon Principles Annual Disclosure Report," 15 signatories have successfully reported their alignment. The average reported alignment score is 1.2 percent, which means that the 2019 greenhouse gas (GHG) emissions associated with signatories’ shipping portfolios are on average 1.2 percent above the decarbonization trajectory expected by the IMO. Individual scores ranged from minus-45 percent to plus-32 percent.
The success of the reporting exercise is a significant step forward for the Poseidon Principles as it brings the agreement into operation. However, what is more significant is how signatories have begun to use the agreement. In their disclosures, signatories consistently noted that the principles have contributed significantly to overcoming the data barriers to understanding the climate impacts of shipping portfolios and are a useful tool for understanding the overall climate alignment of portfolios.
Furthermore, signatories also have noted that the carefully considered methodology helps to point out GHG hotspots in portfolios as well as potential drivers of excess GHG emissions. This is already serving as a useful tool for engaging existing clients and provides a framework to assess new clients and projects.
As shipping desks build deeper climate expertise and service providers develop solutions to support those needs, we expect that the implementation of the Poseidon Principles will continue to deepen for the months and years to come.
Not just sticks: Bringing carrots to climate alignment
In addition to using the principles to understand the alignment of shipping portfolios and engage clients when hotspots are identified, signatories also have used the principles to offer "carrots" to clients as well. Only one year after launch, European signatories to the principles have structured over $1.2 billion in Poseidon-linked facilities that tie the cost of capital to GHG performance, specifically climate-aligned GHG performance.
2020 got off to a strong start, with lead arrangers Nordea, ABN Amro, Crédit Agricole, DNB and SEB putting together a $390 million senior secured refinancing for New York-headquartered International Seaways last January. The package comprised a five-year $300 million term loan, a five-year $40 million revolving credit facility, a 2.5-year $50 million transition credit facility and a $100 million accordion feature. The term loan and revolver include a sustainability-linked pricing mechanism based on Poseidon.
In July, ABN Amro refinanced a $15 million receivables facility for Ireland-based Ardmore Shipping, which also contains a pricing adjustment feature linked to carbon emissions reductions. The revolver has a margin of L+390 and matures in 2022, with an option to extend for two more years.
On average, 2019 emissions from the signatories was 1.2% above the decarbonization trajectory.
"Overall, Ardmore’s AER result for the fleet is 6.11 grams per ton-mile (g/tm) for the last four quarters to September 30, 2020 which is meaningfully below the Poseidon Principles AER target for 2020 of 6.8 g/tm," said Ardmore in its Q3 earnings.
In September, Antwerp-headquartered crude oil tanker company Euronav secured a $713 million loan package from a Nordea-led lending consortium.
"This is the first major financing of our fleet we have with specific emission requirements," said Euronav in its Q3 earnings. "These targets start immediately with compliance over the first 12 months being rewarded with a reduced interest coupon of five basis points."
Most recently, in October, French duo Société Générale and BNP Paribas announced a $200 million, six-year senior secured SLL for Hong Kong-based Seaspan. Pricing is based not just on Poseidon-inspired vessel carbon intensity reductions but also on Seaspan’s ability to include sustainability-linked provisions in future charter contracts.
While the structures, pricing and uses of proceeds of these deals vary across the transactions, a common trait is that lenders used margin-based mechanisms to incentivize emissions reductions.
A growing ecosystem of 'aligned' initiatives
2020 saw two further Poseidon-inspired initiatives launch in the shipping industry. The success of Poseidon as a climate alignment agreement among shipping financiers was followed in October with the launch of the Sea Cargo Charter — a framework among ship charterers for assessing and disclosing the climate alignment of chartering activities.
"All stakeholders must play a role in addressing the adverse impacts of maritime shipping. This is why responsible financial institutions have established the Poseidon Principles," said Michael Parker, chairman of global shipping, logistics and offshore at Citi and chair of the Poseidon Principles Association. "The Sea Cargo Charter is another important initiative that will help the maritime industry to meet the greater goals of society."
The establishment of the Sea Cargo Charter means that 17 of the world’s largest trading and commodities houses will join ship financiers in pushing the maritime shipping industry to get on a pathway to net-zero emissions.
In November, a working group at the Climate Bonds Initiative launched the Shipping Criteria of the International Climate Bonds Standard (CBS), building on the Poseidon loan methodology to create a Use of Proceeds methodology for green bonds. CBS also provides guidance on how companies can transition the performance of their assets and businesses towards zero-carbon.
On the horizon
The Poseidon Principles have established a model for how the financial sector can kick-start sectoral decarbonization. Experts at RMI’s Center for Climate-Aligned Finance see similar opportunities across other high-emitting sectors and are hopeful that 2021 will bring about the next chapter in climate leadership by the financial sector.