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Katalin Dobránszky-Bartus, ECSA Senior Director of Innovation, Finance and Fiscal Affairs, on the shipping sector’s transition to Net-Zero

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BRUSSELS, 5 December 2022

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With the EU embarked on a journey to net-zero, it is necessary to take concrete and practical steps to ensure the transition of the entire economy. Shipping represents the means of transportation for 90% of global trade, 76% of the EU’s external trade is shipped by sea and almost 40% of the world fleet is controlled by European shipowners^[1]. Therefore, it is clear that maritime transportation is a sector that cannot be excluded from this discussion. As shipping will continue to be vital for global and EU trade, a constructive approach providing innovative and sustainable solutions can be the only way forward. To ultimately reach decarbonisation, new means of propulsion, new low carbon or fossil free fuels available worldwide and collaboration with partners in the supply chain are necessary. These complexities require rethinking the interaction between the shipping and financial sector as the financing of new technologies becomes necessary.

In this interview, Katalin Dobránszky-Bartus, Senior Director of Innovation, Finance and Fiscal Affairs at European Community Shipowners’ Associations (ECSA), provides insight on how the shipping industry is facing the challenges posed by the race to net-zero, how the latter is altering the interaction between the shipping and financial sector, and ultimately what success will depend on.

1. How are climate and sustainability considerations affecting the shipping industry? What are the key drivers (e.g. market, regulatory, etc…) and which are the main challenges?

The European shipping industry is a strategic asset to Europe due to its contribution to European economy and trade, and its global presence. The EU shipping industry recognises its key role in addressing the climate crisis and has therefore strongly supported the objectives of the European Green Deal and EU Climate Law, having committed to becoming carbon-neutral as soon as possible.

As we strive to reach this objective, regulatory initiatives have an important role to play and this is where the EU is pushing the envelope when it comes to shipping. The European shipping industry has welcomed the increased climate ambition of the Fit for 55 package, while highlighting the need for practical and implementable solutions which build on the specificities of the shipping sector. Within the flagship initiative of the EU on climate, the ‘Fit for 55’ package, a number of legislative proposals such as the inclusion of shipping in the EU Emissions Trading System (ETS), the FuelEU Maritime Regulation and the revision of the Renewable Energy Directive will affect the shipping sector. European shipowners have underlined that we need all hands on deck to address the climate crisis and facilitate the energy transition of the sector. For instance, we were critical of the lack of requirements for the fuel suppliers, who will have to make clean fuels available in the market, and the commercial operators who take decisions affecting the emissions of a vessel. It is essential to create a market for new low and zero carbon fuels to come onto the market. ECSA has strongly advocated for aligned targets to be placed on the shipping sector and on fuel suppliers to ensure compliant fuels are made available in sufficient volumes to meet the EU’s climate objectives.

This is because, currently there are no readily available zero-emission technologies or fuels. Efforts towards lower-, and eventually zero-emission fuels are ongoing, but require the contribution of all actors in the maritime value chain, especially shipyards, engine manufacturers, but also classification societies, ports, energy companies and the fuel supply chain. With new technologies and fuels, experience has shown that initial uptake is slow as the technology is being demonstrated. After experience is gained with new technology, the related costs and risks are reduced and the new technology becomes more accessible for the shipping community at large. This in turn leads to an increase in uptake and investment (a reinforcing cycle).

This leads to the third key driver: access to financing. The shipping industry is resilient because of its diversity in terms of ship types, sizes, range of operations, modi operandi and business models. This implies that a one-size-fits-all approach when regulating access to finance for green investments is extremely challenging and could potentially prove to be counterproductive if it fails to take into account the different needs of the different segments.

2. How are shipowners preparing for their transition to net zero and what are their key considerations? Are target setting and transition plans becoming a common practice in the shipping industry?

The climate crisis is one of the biggest environmental and economic challenges our societies have ever faced and this is reflected by the priorities of citizens, civil society, the industry and governments. There are a lot of companies that are frontrunners,  setting targets and investing in clean fuels and new technologies. In this regard, a lot of initiatives for the uptake of clean fuels and a number of commitments have been published. It is key to spread out the progress already made and address the bottlenecks. To that end, it is essential to ensure a level playing field in the sector. A prerequisite is proper access to financing. The backbone of our industry is SMEs and the diversity of the sector, and the different needs of different segments is often not taken into account.

3. Is the interaction between shipowners and the financial industry changing? To which extent are changes and considerations (including climate risk considerations) in the financial sector impacting your members?

Shipping, being a global industry, is financed by a wide range of tools including banking resources and non-banking resources, such as leasing, alternative lending, private equity from Funds, public markets and investors. In Europe, due to the historical structure of European financing, bank financing has played a significant role. For the last 11 years, however, shipping bank portfolios in Europe have been shrinking while, shipping portfolios in Asia and Australia have grown. The primary reason for the decrease in European bank shipping portfolios is the enhanced implementation of the Basel prudential rules. The implementation of the new set of Basel rules will further restrict banks from lending to the industry if the specificities of ship finance are not recognised. While ship finance is a niche market segment for banking, the impact on the shipping activity, and hence indirectly on the transition of the industry, will be significant.

The decision to reduce the shipping portfolios is also very much dependent on each bank’s own policies and terms, especially when it comes to climate risk considerations. Shipping companies have been facing many different approaches to assess sustainability and climate risks when it comes to financing. This requires significant resources, which creates additional difficulties especially for SMEs. A harmonised regulatory approach in this regard would be beneficial.

Attempts have been made to address reporting on what is considered to be a sustainable economic activity. One regulatory initiative is based on the Taxonomy Regulation, which defines and/or will define green, best in class economic activities for investment purposes.  However, the taxonomy is currently not fit for transition finance, which is what shipping needs. The taxonomy definitions based on the technical screening criteria are also highly technical, requiring an in-depth knowledge of shipping often at engineering level. It is therefore essential that definitions are developed with the right experts but also there is a transparent and usable set of criteria to avoid making compliance with requirements too burdensome even for finance providers.

4. What is success dependent on? What is, in your view, still needed by policy makers, governments or others to facilitate the transition to net zero?

One of the key elements to maintain the competitiveness and the strategic importance of shipping for the EU, especially in view of meeting our climate objectives, is to ensure that stable and affordable ship financing is available in Europe. When shipping companies have to seek financing outside of Europe, this creates the risk of loss of control over strategic assets, while at the same time having an impact on the whole EU shipping value chain (e.g. equipment manufacturers, yards etc.). For example, under the current prudential regulation and due to its approach towards financial risk, the financing possibilities of European banks may be limited. Risks of new technologies and new projects, without historical data available on financial performance of these projects and investments will lead to significantly higher funding costs, if the risks can be taken on board at all. It is therefore crucial that regulatory requirements for banks, investors and market players take into account the European shipping industry’s specificities and allow ship financing to remain and increase in Europe.

Given the scale of the challenge, it is however key to have a strong financing and funding mix in place to support the decarbonisation of shipping. This is why ECSA, in cooperation with the maritime industry at large, has advocated for the earmarking of the revenues generated from the inclusion of the shipping sector in the EU ETS for the maritime sector. These resources should be channelled towards the scaling up and deployment of low- and zero-carbon fuels and propulsion technologies on board vessels and infrastructure on shore and contribute to lowering the price gap between conventional and low- and zero-carbon fuels, so that they become commercially available. It would also address the difficulty concerning who will fund projects with high risks, such as R&D and innovation projects for low- and zero-carbon fuels and propulsion technologies considering operational and critical safety issues associated with the supply and use of low- and zero-carbon fuels.

^[1] Oxford Economics: The value of shipping, https://ecsa.eu/index.php/resources/infographic-economic-value-eu-shipping-industry-2020-update

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For more information:

Alexia Femia, Financing Sustainable Growth Adviser, a.femia@ebf.eu

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