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by James Mitchell, Finance Lead, Maritime at Carbon War Room

The shipping industry faces structural and regulatory changes to reduce its contribution to global greenhouse gas (GHG) emissions. With the[ds_preview] finalisation of a climate strategy from the International Maritime Organisation (IMO) in 2023, and the distinct possibility of European shipping becoming subject to the EU Emissions Trading System in 2023, the future impacts of such policies can no longer be ignored – even during the present challenges relating to sulphur and ballast rules.

This means that a newbuild financed today will likely have to be competitive under such regulations before its first dry dock. However, we have little evidence such considerations are being made in building, lending, or investment decisions today. The timing and stringency of incoming regulation remains unknown, but scenario analysis can help investors navigate future uncertainties, and help financiers as well as shipowners make more informed decisions about their assets.

This is what is necessary to understand climate risk, the direct and indirect financial impacts of GHG regulations on the shipping industry as well as the Paris Agreement’s impact on demand for shipping services. Without sufficient analysis, disclosure, and mitigation of these risks, investments may perform poorly and banks could experience unexpected write-downs or conversions to liabilities.

Many financial stakeholders are aware of climate risks; from the G20 to the Bundesministerium der Finanzen, these risks are becoming acknowledged and their management expected. However, within shipping, few banks actually assess individual ship efficiency as part of lending decisions, and to date, none have climate stress tested their shipping portfolios against potential future GHG policies.

Quite simply, better-managed companies will fare better through the new challenges of decarbonisation. This will reward the investors and financiers who engage now to ensure that risks are understood and managed and opportunities are identified. The longer companies wait to prepare for decarbonisation, the more expensive and difficult it will be. Now is the time for the shipping industry to take clear and concrete steps towards becoming a profitable low-carbon industry. A critical element of this is effective preparation for future policy scenarios through the implementation of decarbonisation-ready solutions ahead of regulation.