Bayes Business School marks COP28 with event on decarbonising shipping

Shipping industry figures and Bayes Business School (formerly Cass) academics evaluated potential financing options for the decarbonisation of the sector during a panel discussion tied to COP28 this week.

Shipping accounts for close to 3% of greenhouse gas (GHG) emissions – which rose by 10% between 2012 and 2018. Although the industry is less polluting than other forms of transport, it is a significant contributor to global emissions because of its sheer scale: it is involved in more than 80% of world trade and seaborne trade has increased at an average rate of 3.3% since 2000.

That is why regulators are introducing stricter rules and levies – such as the EU Emission Trading System, which comes into force next month. The sector has been under scrutiny since the summer, when the International Maritime Organization agreed targets of a 40% reduction in CO2 emissions by 2030 (compared to 2008) and net zero GHG emissions by around 2050.

The discussion brought together academics, shipowners/investors, senior sector analysts and a senior Department for Transport civil servant.

New Bayes research sets context

Dr Ioannis Moutzouris, Onassis Senior Lecturer in Shipping Finance and Analytics at Bayes Business School, City, University of London, set the context for the panel discussion by outlining headlines from research he and colleagues have undertaken.

He said: “The shipping industry has slowly started to respond to those regulatory and reputational pressures, but it faces an investment ‘trilemma’ stemming from uncertainty. That centres on the utility, price, and availability of greener fuel sources – but also on the implications of current and forthcoming regulations.

“Since concerns around the technological challenges have dominated academic research, at Bayes we recognised the urgent need to swiftly examine the financial challenges and identify solutions which will fund the decarbonisation of the shipping sector.”

Previously, shipowners’ investment decisions focused on freight market conditions, but they now must consider both technological and regulatory developments.

Outlining this challenge, Dr Moutzouris said: “Should they invest in a ‘traditional’ vessel or an eco-friendly one? How will current and forthcoming regulations affect the industry? Are we certain what the fuel of the future will be and what the likely cost and efficiency of that fuel is in the longer term? What do we know about the safety of greener fuels?”

Key research findings from the Bayes team include:

• Between January 2005 and March 2018, there was a 58% correlation between the average earnings of a vessel and the number of (new) orders for newbuilding vessels. However, this has fallen to 21% since the adoption of the initial IMO Strategy on reducing shipping GHGs in April 2018.
• Eco-friendly second-hand vessels are around 23% more expensive than standard vessels.
• Market conditions have a significant impact on that ‘eco price premium’, with the margin falling from an average of 31.4% in relatively weaker markets to 15.4% in stronger ones.
• Marine fuel prices are found to increase this price premium in ‘bad’ markets but not in ‘good’ ones.
• While the ‘eco price premium’ is 23%, the time-charter rates that the owner of an eco-friendly vessel receives are, on average, only 10% higher than those of standard vessels.

Small to medium lenders dominate current market

Ahmad Abou Merhi, Executive Director and Head of Portfolio Management of Pelagic Partners, an alternative investment fund manager overseeing shipping industry assets of around US$400m, and a second-generation ship owner, was asked whether his company was seeing a greater financing appetite when they brought forward a ‘green investment opportunity’.

He responded: “It has not increased by the extent we expected. We have seen an increased offering of sustainability-linked bonds and sustainability-linked loans, but almost all commercial banks look exclusively on employment first, and then on your ‘green performance’ second.

“You can bring forward a very green-friendly project, and if you do not have long-term employment in place, most big banks would not touch it. A significant proportion of the lending market today is done by small-to-medium and alternative lenders who do not have strong ESG-related agendas.”

The sector is seeking to adapt

Alastair Stevenson, the Head of SSY's Digital Analytics group in London, said the “industry as a whole has embraced the decarbonisation objectives set by governments and the IPCC”.

“Both owners and charterers have improved efficiency and even adopted slower speeds,” he said.

Addressing the willingness to explore technological solutions, he said: “This is an exciting time for the industry with many companies experimenting with technologies that either radically reduce or completely eliminate carbon emissions. That includes everything from wind assistance and air lubrication systems to potentially zero-carbon fuels: such as ammonia, hydrogen or even nuclear.”

He cautioned however that there is no consensus on the best technological mix and current experimentation will “have winners and losers, but this is a process that in time will lead to decarbonisation”.

Such tech innovation and new regulatory requirements, including the imminent expansion of the EU’s emissions trading system, will mean higher costs that will ultimately be passed onto the consumer, Mr Stevenson added.

He concluded: “Regulation and technological experiments come at a cost. There are costs to complying with IMO and EU regulations. Research costs. Engineering costs. The costs are not insignificant, and they will need to be recouped – ultimately by the consumer. One of the biggest challenges, especially for owners, is how to manage these costs in a highly competitive industry that historically has rewarded cost minimisation.”