Insurers can’t dictate rate of decarbonization in shipping: Miller

While the insurance industry can cajole and encourage, it cannot dictate the rate of decarbonization in the shipping industry, says Miller insurance Services in Miller Marine Market Report H1 2023.

The Poseidon Principles for Marine Insurance include a standardized covenant clause in each new finance agreement, requiring shipowners to provide specific data. By the end of 2022, 30 shipping banks representing ~$200bn of available ship financing (two-thirds of the market), had signed up to these principles.

Miller said that the impacts of financiers’ power could be noted as recently as June 2023, when it was reported by Loadstar that Legal & General Investment Management (LGIM) sold its stake in China’s Cosco, after criticizing its alleged (lack of) effort to decarbonize.

“There are, no doubt, many similar actions being taken within the financing industry. Financiers are reviewing not only current environmental concerns, but also their positions regarding financing to ‘future proof’ their investments”, said Miller.

To meet the Paris Agreement of 1.5C, recently ordered ships will have to evolve to use scalable zero emission solutions or be scrapped before end-of-life.

The BRS Shipbrokers 2023 review reported that, by the end of 2022, a little less than 30% of the worldwide shipbuilding orderbook (and 22% of the worldwide shipbuilding orderbook excluding LNG carriers) was dual fuel. Miller observed that, at this pace, it would take more than 100 years to have a dual fuel fleet in place.

With regards to liquefied natural gas (LNG), whilst current regulations can incentivise LNG capable vessels now, the Paris Agreement requires moving away from LNG as a fuel. As LNG is 90% methane, unburnt fuel will be primarily composed of a gas that traps 86 times more heat than the same amount of CO2. The LNG capable fleet ‘at risk’ of otherwise early retirement, could be around $850bn by 2030, as reported by UCL Energy Institute.

Miller said that vessels with a poor carbon intensity index score (the measurement of carbon emissions), were already proving difficult to sell. It was likely that the development of a differential in freight rates between compliant and non-compliant vessels would occur.

Klaveness Combination Carriers (KCC) was already claiming a first in the tanker and bulker sectors, by linking charter fees to CO2 emissions. The charterer pays a supplement to the agreed charter rate if emissions are below an unspecified level, and gets a rebate if emissions exceed that agreed level.

Miller said that these emission ‘swing’ charters helped make up the funding proposition when banks are approached. “As these gain traction, they are likely to become a more meaningful aspect of any financial consideration.”

Once again, the IMO came in for some mild criticism. “Historically, the IMO has moved at the pace of the slowest member states, resulting in criticism of the pace of change, with China even lobbying for this 2050 date to be further pushed out to 2060”, said Miller, while noting that pressure was being applied to accelerate that rate of reduction.

The July 2023 meeting of the Maritime Environmental Protection Committee (MEPC) at the IMO was termed “somewhat disappointing”, with “with very non-committal statements” on the move towards net zero by 2050. The goal was termed as “by or around” 2050, and then only if “national circumstances allow” it. Meanwhile, a subtle and curious linguistic gap was opened up between a “target” and “striving for a target”

Intermediate goals have been set of 20% (striving for 25%) by 2030, and 70% (striving for 75%) by 2040. “Despite a periodic review of the strategy, these appear to be more aspirational than hard targets, and with no apparent stick or carrot for unsuccessful or successful achievement”, observed Miller.

Moller concluded by saying that “the outcome of this meeting is extremely unlikely to take the pressure off the shipping industry, and the monitoring of progress is likely to remain in the crosshairs of pressure groups. It can only be hoped that the lead taken by the EU ETS and, to a lesser degree the Poseidon Principles, will help accelerate the pace of change”.