The initiative is named after the Greek God of the sea and, for the shipping industry at least, it is certainly expected to make waves. Adopted in June, the so-called Poseidon Principles aim to reduce carbon emissions in the sector by aligning financial institutions’ shipping portfolios with the International Maritime Organization’s (IMO) target of a 50% emissions reduction by 2050.
The global framework – which will establish a common way of assessing and disclosing whether a bank’s lending portfolio is in line with broader climate goals – has been described as the first ever sector-specific, self-governing climate alignment agreement between financial institutions.
The initiative comes as industry figures call for “unparalleled innovation” across the entire maritime value chain to help accelerate the process of decarbonisation and meet the IMO’s ambitious new climate goals.
“To deliver on ambitious climate targets, zero-emission vessels will need to enter the fleet by 2030,” said Søren Toft, chief operating officer of A.P. Møller-Mærsk. “This leaves us only ten years to develop the new marine fuels, propulsion technologies and infrastructures that will be required. The Poseidon Principles will help us catalyse this transition.”
As part of the agreement, banks will pledge to make sure that any lending decision they make takes into account a variety of climate considerations. Dr Tristan Smith, reader in energy and shipping at UCL’s Energy Institute, says that the goal is to bridge the long-term risk of climate change with the short-term decisions that usually get made within the sector.
“The Poseidon Principles are a mechanism to try and incorporate that long-term risk within the shorter-term time frame in which mortgages and loans are established and reviewed by financiers,” says Smith, who is on the advisory council of the Global Maritime Forum, an international non-profit organisation.
Among the founding signatories of the Poseidon Principles are Citi, Societe Generale, DNB, Amsterdam Trade Bank, and Danske Bank. The signatories represent a combined bank loan portfolio of approximately $100 billion – roughly 22% of the total value of all shipping asset portfolios.
Selling the initiative to banks was relatively straightforward, according to Smith, largely because the Poseidon Principles offer clear benefits to financial institutions as well as the wider shipping industry.
“It is not difficult for a bank to see that the Poseidon Principles themselves are actually quite helpful,” he says.
One of the biggest hazards any lender might face, for example, is what the industry often calls a ‘stranded asset’: an asset that has suffered from an unanticipated or premature write-down or devaluation.
With new shipping technologies and fuels being introduced in light of IOM regulations and wider shifts within the global energy system, banks must therefore ensure they invest in assets that will not simply become redundant in a few years’ time.
“While we know there are going to be big changes we don’t know the specifics,” Smith explains. “And so a financier in 2019 or 2020 cannot say for sure that a certain asset will be compliant in the future and pose no risk.”
“What we’ve tried to do with the Poseidon Principles is come up with a way in which financiers can take all of those risks into account and bring them into a process that enables them to manage the risk in a way they weren’t previously doing.”
Promoting greener shipping
It is hoped that once banks start factoring climate mitigation into their lending decisions, shipping companies will be incentivised to adopt more environmentally friendly technologies.
If a ship owner is asking for a seven-year mortgage, for example, a lender signed up to the Poseidon Principles will want to make sure that asset will not become a future liability from a carbon emissions perspective, even if it is compliant at the time the loan is issued.
“That enables the shipowner to justify a longer return on investment, and throw in a piece of technology that might need more than the next two years to pay off because they can use that as a justification in order to get the finance that they are approaching the bank for,” says Smith.
The ground-breaking initiative is expected to evolve over time as the IMO further defines its ultimate ambition for climate mitigation. While the organisation has said the shipping industry must reduce total GHG emissions by at least 50% by 2050, the final amount has not yet been agreed on.
“We know that it’s going to be 50% or more but we don’t know if the final number will be 60%, 70%, 80%, 100%, or even an earlier year than 2050 for zero emissions,” says Smith. “All of that will be taken on board…and maybe in a couple of years’ time there will be some slight tweaks or changes to the Principles.”
Moving forward, it is hoped more banks will add their names to the initiative though for now the majority of signatory banks are from Europe and North America. Getting the concept established in places like China, Japan, Korea and South America will involve properly “engaging with those communities,” says Smith.
“That just takes time and it takes cultural sensitivity,” he says.
Even if it is a slow process, Smith remains confident the value of the Poseidon Principles will ultimately shine through, particularly as the signatory banks begin to gain market share as a result of their involvement.
“I think the signatories will become leaders in the shipping market because they will be better prepared to manage this otherwise turbulent period in the sector,” he says. “And that will then naturally lead others to sign up.”