Ship loans typically run for 5-7 years. File Image / Pixabay

Banks dealing with shipping finance may be underestimating the long-term financial risks posed by the energy transition, despite appearing insulated from losses at the individual loan level, according to a new UCL study.

The report finds that traditional ship finance structures largely shield banks from direct losses when vessels lose value due to tightening emissions rules or shifting fuel demand, UCL Energy Institute and consultancy Strider Carbon said in an emailed report on Thursday.

In most cases, shipowners’ equity absorbs the initial hit, with lenders protected by conservative loan-to-value ratios.

However, the study highlights a more structural concern: systemic refinancing risk.

Because ship loans typically run for 5-7 years while vessels operate for 20-25 years, banks can exit exposure before climate-related devaluation fully materialises.

But if multiple lenders simultaneously pull back from shipping in the mid-to-late 2030s, vessels could struggle to secure refinancing, potentially forcing asset sales at depressed values.

Such “fire-sale” conditions could push recoveries below outstanding loan balances, creating losses across the banking system- even if individual institutions had previously managed their exposure prudently.

The report also flags several constraints limiting banks’ ability to manage climate risk effectively, including inconsistent data disclosure, competing green taxonomies, and the complexity of modelling long-term, non-linear transition scenarios.

It further notes an imbalance in current risk strategies, with most banks focusing on supply-side risks such as vessel efficiency and regulatory compliance, while giving limited attention to demand-side risks like declining fossil fuel trade.

The study suggests that coordinated action, including support from public finance and mechanisms such as an IMO Net Zero Fund, could help de-risk the transition and avoid disorderly outcomes for both shipping and its financiers