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US$400 billion exposure for shipping industry

LONDON: February 27, 2017. New research suggests financial institutions supporting the global shipping industry have a US$400 billion exposure to future emissions regulations and need to develop a policy to protect their assets.

UMAS A report commissioned by the Carbon War Room, founded in 2009 by Richard Branson and other entrepreneurs to find ways to reduce CO2 emissions, lays out a first approach to climate stress-testing of shipping assets and proposes that action today by financiers, shipowners and shareholders can avoid losses by the mid-2020s.

"Risk is nothing new to the shipping industry or to the major financial institutions that bankroll it, but climate transition risk is," explained James Mitchell, Carbon War Room senior associate for shipping. "If a newbuild financing decision is made today, that vessel will very probably have to compete under new International Maritime Organisation or EU policy actions before its first drydock."

The 18-month study by UMAS, a commercial advisory service supported by the UCL Energy Institute and the management expertise of MATRANS, examined various investment scenarios for drybulk newbuilds between 60,000–99,999 deadweight tonnage to determine the level of exposure.

UMAS has concluded that while some financial stakeholders are aware of stranded asset risks, few banks are assessing ship efficiency or have lending programs in place to keep assets competitive, despite the level of debt.

"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," said Tristan Smith, director of 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," he added.

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