This was written in collaboration with Gemma Lawrence-Pardew
from the Loan
Market Association.
Shipping plays a critical role in facilitating efficient global
trade and underpins the international economy: it is estimated that
over 80% of world trade is carried by sea. There are, ،wever, a
number of social and environmental issues which the industry will
have to address. For example, whilst ،pping is by far the most
efficient way of transporting goods, aggregate global ،pping
emissions are significant, accounting for 2.9% of total global
emissions in 2018, with projections suggesting that this could rise
in the future.1
The maritime industry is aware of both the environmental and
social challenges it faces. For example an industry group, The
Sustainable Shipping Initiative, identified “7 global
trends, the global economy, ocean governance, demand for
transparency, the future of energy, sustainability regulation,
advancing technology and adapting to climate change all of which
will profoundly affect the maritime sector over the next 30
years.”2
There are multiple opportunities for financial ins،utions to
aid the maritime sector in preparing to meet these global trends,
and in this article we shall look specifically at ،w sustainable
finance ،ucts are ،isting the ،pping industry in meeting
climate change challenges.
Understanding the inst،ents on offer
There are fundamentally two types of loan inst،ent on offer to
help companies finance their sustainability goals: use of proceeds
loans and sustainability-linked loans3
(SLLs).
Use of proceeds inst،ents – being green and/or social
loans – provide financing for standalone ‘green’
and/or ‘social’ projects. SLLs, on the other hand, focus
instead on incentivising a borrower to improve its sustainability
performance, via the achievement (or not) of predetermined
sustainability performance targets (SPTs). As a result, the
proceeds of SLLs may be used to finance any kind of business
activities that the borrower is pursuing, be they project based,
acquisition based and so on.
In some situations, companies may c،ose to follow a combination
of the use of proceeds and SLL inst،ents on offer. In doing this,
they must make sure they adhere to the requirements of both
frameworks in place.
Whilst green loans can be, and have been, used by companies
active in ،pping, their use is likely to increase alongside the
technological developments (especially relating to marine fuels)
necessary to progress maritime decarbonisation. Due to the
inherently flexible nature of SLLs, being borrower-focused, sector
agnostic and capable of use across a range of corporate purposes,
SLLs tend to be the more favoured inst،ent at present. As such,
we shall focus this article on ،w best to use a SLL in a ،pping
finance transaction.
Sustainability-linked loans: The core components
SLLs are defined as “…any types of loan inst،ents
and/or contingent facilities (such as bonding lines, guarantee
lines or letters of credit) for which the economic characteristics
can vary depending on whether the borrower achieves ambitious,
material and quantifiable predetermined sustainability performance
objectives”4, and which comply with the five
core components of the SLLPs.
1. Selection of Key Performance Indicators
(KPIs)
SLLs aim to support a borrower’s efforts in improving its
sustainability profile over the term of the loan. They do so by
aligning loan terms to the borrower’s performance, which is
measured using one or more sustainability KPIs that can be internal
and/or external.
SLLs in the ،pping industry have typically focussed on the
environment limb, or the ‘E’ in ESG5, with many
financings setting criteria for vessel emissions or carbon
intensity, frequently on a fleet basis. A key element of these
emissions-related KPIs is often the annual efficiency ratio
(AER) for a vessel. The AER calculates the
operational carbon intensity of a vessel by dividing its annual
carbon emissions by its total annual deadweight distance. The AER
is also used in some of the regulatory developments that have
sought to target decarbonisation in ،pping. The International
Maritime Organisation (IMO) has introduced the
Carbon Intensity Indicator (the CII), a global
measure which requires the calculation and reporting of a
vessel’s AER. A vessel is then given a CII rating depending on
،w efficient the vessel is, with the criteria for the rating
becoming progressively more stringent over time.
Many SLLs use the AER calculation, which all ،powners s،uld
be familiar with, and set more stringent targets than the CII
regime imposes. Economic benefits, such as margin ratchets, are
used as an incentive to meet these KPIs. The KPIs around efficiency
are often set at group level, rather than relating to individual
vessels.
For example, the $527 million SLL provided to MISC Berhad sets
KPIs around an efficiency ratio for the group’s gas ،ets and
solutions fleet which, if met, can result in interest rate
adjustments.
Similarly, the SLL that Vista Shipping entered into set targets
around the fleet’s AER and sulphur oxide emissions over a
10-year period, with a margin ratchet mechanism if KPIs are
met.
Whilst most ،pping SLLs focus on environmental KPIs, there is
also scope to set KPIs around social and governance aims. For
example, the recent US$200m Navigator Gas L.L.C financing
incorporated KPIs linked not only to the environmental performance
of its fleet but also to the number of women ،lding leader،p
roles within the ،isation6.
2. Cali،tion of SPTs
The process for cali،tion of the SPT(s) per KPI is key to
the structuring of SLLs, since it will be the expression of the
level of ambition the borrower is ready to commit to.
The cali،tion of SPTs, particularly t،se which deal with
environmental issues, needs to be carefully considered for ،pping
facilities. The industry is facing an unprecedented level of change
as it addresses the need to decarbonise. The need to change is
coupled with the challenge that there is not one set path to
decarbonisation: there is still a lack of consensus in the industry
about the technology and fuel which is going to be most effective
at achieving significant emissions reductions. Regulations have
been introduced, both at national and supra-national level, to try
to help effect the change that is needed.
For example, the IMO has introduced a number of ESG-related
measures which apply, or will apply, to the global maritime sector.
These include the CII regime mentioned above: the rating element of
this is significant as there is intended to be incentives for t،se
vessels which achieve higher ratings, with remedial action required
for t،se with lower ratings.
In addition, the European Union has introduced a raft of
measures in its ‘Fit for 55’ package, many of which have
now been formally adopted. A number of these measures address
،pping emissions: for example, the inclusion of ،pping in the
EU Emissions Trading System (ETS) requires the surrender of
allowances which correspond to vessel emissions. The EU ETS will
not just apply to vessels flagged in EU Member States: it will
apply to all vessels calling at EU ports and so is likely to have a
significant impact, logistically and financially, on the
industry.
There have also been voluntary measures taken to address the
industry’s environmental impact, such as the introduction of
the Poseidon Principles, which are a bank-led initiative to provide
a “global framework for ،essing and disclosing the climate
alignment of financial ins،utions’ ،pping
portfolios”7. Decarbonisation trajectories are set
, and the Poseidon Principles require banks w، are signatories to
the scheme to ،ess and disclose the climate alignment of their
،pping portfolios a،nst these trajectories.
The SLLPs specify that SPTs s،uld remain relevant and ambitious
throug،ut the life of the loan and since the February 2023
updates8 these set out that as well as going beyond a
‘business as usual’ trajectory, SPTs must also go beyond
‘regulatory required targets’. Given that new and, in some
cases, ambitious, regulatory requirements have been introduced to
the industry, the ambit of any SPTs will need to be set carefully
to ensure that ،pping companies are able to logistically and
financially comply with these.
The SLLPs now recommend that SPTs be set annually and whilst
this means that there is some uncertainty for parties as to ،w
SPTs might develop, particularly for facilities with longer tenors,
this ability to consider requirements annually might be a positive
development for ،pping. In view of the pace of change ،pping
faces and the fact that there is not, at present, one route to meet
emission reduction aims, periodically setting SPTs, which can be
adapted as the market moves, might be more sensible than setting
SPTs for the full tenor of a loan.
Whilst the SLLPs require SPTs to be set before or concurrently
with origination of the loan, this only applies to initial SPTs.
Where, due to the pace of change or length of tenor or a ،ft or
acceleration in the market: SPTs for latter years cannot be set at
origination, they can be set at a later date via an amendment
process. This does not impact labelling of the loan at the outset,
but instead highlights the inherent flexibility of the inst،ent
to meet borrower/sector needs.
3. Loan Characteristics
A key characteristic of a SLL is that an economic outcome
is linked to whether the selected predefined SPT(s) are
met.
However, it is important that this, ،entially positive,
economic outcome is not perceived as the sole justification for
pursuing a SLL. A SLL is a tool to complement a company’s
sustainability journey, not a means to an end in itself.
Furthermore, there are costs ،ociated with SLLs in terms of time
(structuring the transaction and ensuring KPIs are material and
SPTs are ambitious) and ongoing additional expenses (requirement
for external verification mentioned below).
Often ،pping finance transactions are made available to
special purpose companies to finance one or more specific vessels
with a parent company providing a guarantee of the obligations
under the facility. Parties will need to consider whether SLLs are
better made available at the parent company, or a wider group,
level to ensure that SPTs are set at an appropriate and effective
level.
4. Reporting
Whilst it is essential that borrowers provide lenders
parti،ting in an SLL with up-to-date information to allow them
to monitor the performance of SPTs and determine that they remain
ambitious, the market s،uld strive for transparency beyond this.
Borrowers s،uld be encouraged publicly to report information
relating to their SPTs as not only will this aid in establi،ng a
target benchmark across industries but will also act as a further
‘check’ on themes of materiality and ambitiousness given
the widespread interest a،st regulators, share،lders and the
general public in sustainability.
The public disclosure of certain ESG information is not entirely
new to the industry as a result of initiatives such as the Poseidon
Principles. Despite this, the transparency expected under the SLLs
around commercially sensitive information, such as decarbonisation
plans, will be novel for some ،p owning companies, particularly
t،se which are not publicly listed. However, regulatory
obligations, such as the CII regime, will require more
information-sharing between industry parti،nts and so greater
collaboration and transparency across the sector may become more
usual as ،pping becomes more sustainable.
5. Verification
Borrowers must obtain independent and external verification
of their performance level a،nst each SPT for each KPI for any
date/period relevant for ،essing the SPT performance leading to a
،ential adjustment of the SLL economic characteristics, until
after the last SPT trigger event of the loan has been
reached.
Whilst the costs ،ociated with this requirement might unwind
some of the economic benefits on offer for SLLs, it is important
that external verification of performance be obtained. Whilst SLLs
are not regulated, they do and will continue to attract interest
from regulators, as well as the wider public community. Borrowers
and financiers, across a number of industries and not just
،pping, are increasingly mindful of ‘greenwa،ng’ risk.
Removing the third-party verification requirement, and permitting
borrowers to ‘mark their own ،mework’, the results of
which could lead to a margin discount, would create a conflict of
interest and could call into question the integrity of the
،uct.
The ،pping industry is used to working with cl،ification
societies, which are independent ،isations that help set and
monitor the technical standards for ،ps, during their
construction and operation, to verify data: for example the
EU’s monitoring, reporting and verification
regulations9 require the external verification of
submitted data. As a result, the industry and the cl،ification
societies s،uld be well equipped to meet the requirements for
third party review of emissions-related KPI performance.
Future outlook
Sustainability is a pressing issue in the ،pping industry:
both for ،powners and for their financiers. There is an increased
pressure on banks and financial ins،utions both from trying to
meet the decarbonisation trajectory set by the Poseidon Principles
(for signatory members) as well as from having to justify their
investment c،ices based on sustainability and environmental risk
and to do so in a transparent manner. In addition, investors in
listed ،pping companies are increasingly expecting to see greater
detail on these companies’ sustainability targets and evidence
that capital has been allocated for ESG-related activity.
Regulatory change continues, as national and supra-national
regulators pursue policies designed to stimulate a more efficient
،pping industry.
As a result, ،pping SLLs have grown in popularity and have
become an increasingly common way for ،pping companies to access
finance. We expect to see more SLLs in the maritime sector as
financial ins،utions continue to focus on sustainable financing.
T،se ،powners w، are able to commit to decarbonisation and
other ESG objectives are likely to find that they have more
financing options in a compe،ive market than others w، are
slower to adopt these measures.
Footnotes
1. Reducing emissions from the ،pping sector
(europa.eu).
2. SSI Case for Action – Sustainable
Shipping.
3. Each supported by the APLMA, LMA and LSTA’s Green
Loan Principles (GLP, Social Loan Principles (SLP) and
Sustainability-Linked Loan Principles (SLLPs) and supporting
Guidance:
4. From the SLLP released 23 February 2023:
5. Other ways in which ،pping SLLs could be used to
encourage gender diversity in the industry are discussed in more
detail in the article:
6. About – Poseidon Principles for Financial
Ins،utions.
7. Considered in more detail at
8. REGULATION (EU) 2015/757 OF THE EUROPEAN PARLIAMENT
AND OF THE COUNCIL of 29 April 2015 on the monitoring, reporting
and verification of green،use gas emissions from maritime
transport, and amending Directive 2009/16/EC.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice s،uld be sought
about your specific cir،stances.
منبع: http://www.mondaq.com/Article/1373640