The Financing of Green Shipping

The shipping industry is a major contributor to harmful air pollution, generating an estimated 2.5 percent of the world’s greenhouse gas emissions. In a global market, the maritime transport sector is depended on as a reliable and cost-effective means of transporting goods. The huge volume of shipping activity and direct impact of the industry on carbon dioxide emissions have led the shipping industry to become the focus of several new green shipping initiatives, particularly in the European market.

What can be done?

It is recognized that technology exists that could cut emissions from the shipping industry by at least 75 percent, but the industry has lagged behind in reducing its carbon emissions and promoting sustainable practices. However, there have been recent signs of change; in February 2018, two Japanese companies announced a partnership to test using solar power on ships and China launched its first all-electric cargo vessel late last year, able to carry 2,200 tonnes with every haul.

Many shipowners have demonstrated a willingness to improve their environmental performance. For example, Cargill has pledged to cut greenhouse gas emissions by 15 percent per cargo-tonne-mile by 2020, in line with the group’s intention to reduce overall emissions by 10 percent by 2025.

Despite their apparent commitment to environmental improvement, owners face a number of challenges to making this reality. Firstly, competitiveness: Investing in greener technologies represents an upfront expense that does not provide owners with a competitive advantage. Users of shipping services are not always willing to pay for goods to be transported in a more environmentally friendly manner, although stricter emissions standards will ensure a more level playing field in this respect. Secondly, the availability of financing: For various reasons, many commercial banks have reduced their lending to the shipping industry. Some banks decided to withdraw from the sector following the 2008 financial crisis. In addition, commercial banks have limited capital and tough choices to make. Ship financing is not always an easy sector to be in, given its high levels of capital utilization, cyclicality and associated risk.

What does this mean for ship finance?

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An Introduction to ECA Finance

In this blog post we take a brief look at export credit agency (“ECA”) supported finance in the asset finance industry, and the development of a new template loan agreement by the UK’s Loan Market Association.

The role of the ECAs

ECA finance describes transactions where states (whether by direct sovereign bodies or by separately mandated organisations) provide (financial) support to would-be purchasers of certain goods or equipment constructed in that ECA’s home jurisdiction.

ECA support can make deals both more bankable and more affordable, and has long been a useful feature of asset and project finance. Over the last two decades, a significant amount of export credit support in the form of both guarantees and insurance has been provided to capital-intensive global projects.

With the increased capital adequacy requirements of the Basel III and Basel IV accords, the importance of the sector has continued to grow. ECAs were once seen as insurers of “last resort” and were largely confined to support high risk financings in emerging markets, with much export credit agency insurance having been counter-cyclical. Whilst the perception remains that ECA support increases in importance as traditional financiers become more reluctant to lend (and so provides a bridge where the required debt finance exceeds the available bank liquidity) they just as often will now be found providing specialised products not available elsewhere, for example political risk insurance. Continue Reading