CWR and UMAS say decarbonisation in shipping will pose increased risks to banks.
Carbon War Room (CWR) and University Maritime Advisory Service (UMAS) today released a new report that suggests that, with the onset of climate policies by 2023, decarbonisation will pose increased risks to the banks that hold approximately $400 billion of the world's shipping debt.
"Markets are weak, capital requirements are increasing, and compliance with upcoming regulations will require significant capital investment. However, actions taken now by financiers, owners, and shareholders will position both individual assets and the industry as a whole for greater long-term profitability, and will ensure that the first step of decarbonisation is a success," said James Mitchell, senior associate for shipping with CWR.
The report, Navigating Decarbonisation: An approach to evaluate shipping’s risks and opportunities associated with climate change mitigation policy, is the third instalment of research on stranded assets and climate risk in shipping from CWR and UMAS, and is said to be the first known scenario analysis of decarbonisation risks in shipping.
The report suggests that, while a number of financial stakeholders are aware of stranded asset risks, there are few banks that assess ship efficiency or offer lending programmes designed to maintain asset competitiveness.
James Mitchell, Senior Associate, Shipping, CWR
Markets are weak, capital requirements are increasing, and compliance with upcoming regulations will require significant capital investment
Looking at outcomes of investment approaches in a range of future scenarios within the 60,000–99,999 DWT newbuild drybulk fleet, the research examines whether the industry is exposed to climate policy-driven risks, and suggests methods for managing those risks.
"Future regulation on shipping GHG is now certain. It’s just the velocity and stringency that remain unknown, and we can handle this by thinking in terms of scenarios. This collaboration has given us an excellent opportunity to further think about how techno-economic modelling can help to identify risks and opportunities to different scenarios and has given us many ideas for our ongoing work," said Dr. Tristan Smith, Director at UMAS.
"The key takeaway from the report is for financiers and shipowners to be prepared and thus it is crucial to future-proof assets now and plan for flexibility from the onset, through for example, designing for future retrofits and using innovative financing mechanisms to deal with a variety of future scenarios."
Smith suggests that scenario analysis, combined with integrated techno-economic assessment across various foreseeable policy scenarios, can help anticipate uncertainties and assist financiers and shipowners make more informed decisions about their assets.