Anchors Aweigh: New opportunities for investors in maritime decarbonization
Aligning the maritime shipping sector with the Paris Agreement’s 1.5°C target requires an all-hands-on-deck approach. This includes financial institutions, given the important role that finance plays in this asset-heavy sector.
Maritime shipping touches around 90% of globally traded goods and is responsible for close to 3% of global greenhouse gas (GHG) emissions. Rising demand for global freight means that maritime trade volumes could double by 2050, according to the International Renewable Energy Agency. Earlier this year, the International Maritime Organization (IMO) revised its GHG emission strategy to put the shipping sector on a path to net-zero emissions by, or around, 2050. This is a welcome step to accelerate the pace of industry decarbonization, even if it falls short of the ambition needed to achieve full alignment with the Paris Agreement.
In response to heightened IMO ambition, finance sector stakeholders are updating their own plans. The Poseidon Principles, a banking coalition for shipping finance which represents $100 billion in loans, recently updated its framework to align with the IMO target, and signatories will be expected to release climate scores for shipping companies benchmarked against the new target.
Asset managers, too, can benefit from encouraging shipping industry leadership on the path to a clean energy transition. The new IMO strategy calls for a minimum 5% uptake by 2030 of zero or near-zero GHG emissions technologies, fuels, and energy sources – and encourages the sector to strive for a 10% uptake. To achieve this, shipping companies will need to set clear transition plans, allocate capital to achieve the required emissions reductions, and collaborate with stakeholders along the value chain. Financial sector support is crucial to help companies reshape their fleet and maritime infrastructure. Companies that fail to decarbonize expose their owners and lenders to technological, financial, and reputational risk and will face a more disorderly and costly transition.
The long timescales required to turn over fleets and develop new fueling infrastructure means that asset managers should encourage companies involved in shipping to take action today. Asset manager Legal & General Investment Management (LGIM) does this in two ways. First, by setting and disclosing expectations for shipping along with other climate-critical sectors, and second, by engaging directly with influential companies through an engagement campaign called the Climate Impact Pledge (CIP).
Through the CIP, LGIM sets expectations for shipping companies, including a net zero target, low-emission and fleet renewal plans, and disclosure of climate-related lobbying activities. Under a model of “engagement with consequences,” companies that do not meet LGIM’s red lines may be subject to voting and/ or divestment sanctions. Voting sanctions are applied across all of LGIM’s funds where LGIM maintains vote discretion, and divestment sanctions are applicable across more than £158bn of assets as of June 2023. In line with the IMO’s new GHG strategy, LGIM has updated its assessment framework and evolved its minimum expectations for shipping companies.
Frameworks such as the CIP allow institutional investors to systematically communicate their expectations to management teams and signal the importance of managing transition risk. We believe the finance sector’s active engagement with the shipping sector can drive company performance improvement as well as support a successful transition.
The new IMO revisions have set a clear decarbonization ambition for the shipping sector, and action by investors, alongside other stakeholders, is required to turn the tide.