Recent years have seen an increased awareness of sustainability issues by governments, international organisations, financial institutions, investors and consumers, also affecting the maritime sector.
Shipping is the lifeblood of the global economy, responsible for the carriage of more than 80% of world trade. While carriage of goods by sea is more carbon efficient than carriage by trucks or planes, the combined shipping industry could make the 6th place if added to the list of the world's biggest greenhouse gas (GHG) emitting countries. The Third IMO GHG Study of 2014 has predicted that these emissions may increase by 250% by 2050 if nothing is done.
International shipping also negatively impacts the environment through other types of pollution, such as emission of SOx, NOx and aerosols in the air, and vessel discharges in the sea. While marine casualties resulting in oil spills are thankfully less frequent due to the efforts by the international community to improve safety at sea, the recent MV Wakashio oil spill off Mauritius is a reminder that major oil spills still pose a threat.
Business as usual is no longer a viable alternative for the shipping industry and it is likely that those who do not take sustainability seriously will be met with increased fees, less favourable finance opportunities, and in the worst case, significant fines. Conversely, those willing to invest in fleet modernisation and greener technology might over time become more competitive due to increased fuel efficiency and from being able to benefit from sustainable financing initiatives.
The IMO's role in sustainable shipping
The International Maritime Organization (IMO) is a UN agency whose main purpose is to develop and maintain a comprehensive regulatory framework for international shipping. The IMO has developed the International Convention for the Prevention of Pollution from Ships (MARPOL), which is the most important convention for the prevention of pollution from ships.
The latest MARPOL supplement, MARPOL's Annex VI, covers the prevention of air pollution from ships. This year, the maximum permitted sulphur content in fuel oil was reduced to 0.5% under Annex VI, requiring industry participants to either switch to compliant fuel or invest in scrubbers. Since 2013, Annex VI has also contained mandatory technical and operational energy efficiency measures that reduce the emissions of all post-combustion exhaust emissions. These include the Energy Efficiency Design Index (EEDI) for new ship types and the Ship Energy Efficiency Management Plan (SEEMP), which applies to all ships.
In 2018, the IMO adopted an initial strategy on the reduction of GHG emissions from ships, aiming to cut them by at least 50% by 2050 compared to 2008 levels. However, a final plan is not expected until 2023. Currently, the EEDI only affects newbuild ships, while the SEEMP does not contain any explicit or mandatory performance requirements. This October, a draft text was presented that introduces a version of the EEDI which applies retroactively to all existing ships – the Efficiency Design Index for Existing Ships (EEXI). The draft text also enhances the SEEMP to include mandatory operational efficiency improvement targets. Although some NGOs have criticised the draft for being unambitious and vague, the draft text was approved at the virtual MEPC 75 meeting this November and are expected to enter into force on 1 January 2023 pending adoption at MEPC 76 in June 2021.
The EU's contributions to sustainable shipping
The EU has been a key driving force towards more sustainable shipping. One example of this is the EU's enactment of Regulation (EU) 1257/2013 on safe and sound ship recycling (EU Ship Recycling Regulation), enacted while waiting for the Hong Kong Convention to enter into force. It is also likely that the EU will be a key player in pressuring the international community towards more aggressive measures addressing GHG emissions. In any case, those wishing to take part in trade involving a EU member state will need to consider potentially stricter EU regulations.
In 2015, the EU adopted Regulation (EU) 2015/757 on the monitoring, reporting and verification of carbon dioxide emissions from maritime transport (EU MRV), which had its first reporting period in 2018. The EU MRV aims to collect data on CO2 emissions by ships of more than 5,000 gross tonnage calling at any EU port, which resulted in the first report being released last year. For now, the EU MRV will be parallel with the IMO Data Collection System for ships calling at EU ports, effectively making two data reporting regimes to comply with.
This year, the EU Parliament voted in favour of a 40% reduction of CO2 emissions from shipping by 2030, favouring a proposal to revise the EU MRV, and to add the affected ships to the EU Emissions Trading System (ETS). In addition, there has been a call for an Ocean Fund financed by ETS revenues to make ships more energy efficient by 2030.
It is also expected that the forthcoming EU Taxonomy will encompass maritime transport. After a Technical Expert Group (TEG) delivered its recommendations in March 2020, excluding most parts of the shipping industry, the EU Commission launched a public consultation on the first sets of screening criteria in November 2020, which also included new rules on sea freight. According to the proposal, sea and coastal freight or passenger water transport vessels "not dedicated to transporting fossil fuels", which also are low- or zero-emission vessels according to more specified criteria, may quality as "environmentally sustainable" under the EU Taxonomy.
The role of private initiatives
While we are still waiting for a global regulatory framework to facilitate sustainable shipping, shipping companies should still be aware of the various private initiatives. With public demands that urgent action is taken on addressing climate change and environmental sustainability, the shipping industry itself, investors and banks are now increasingly taking the initiative themselves. One example of an initiative within the shipping industry is the 'roadmap' created by the Sustainable Shipping Initiative (SSI), which seeks to achieve a sustainable shipping industry by 2040. Although of a voluntary nature, there might be various benefits of joining the SSI, such as the ability to attract more favourable financing opportunities.
As financial institutions are increasingly expected to justify their investment choices, various sustainable financing initiatives have been implemented in recent years. Some financial institutions are even becoming unwilling to fund unsustainable industries as they prefer a 'greener' portfolio. One example of a framework for integrating climate change into the lending decisions of financial institutions is the Poseidon Principles, which specifically monitor the decarbonisation trajectory targets of their shipping portfolios. Another relevant voluntary framework that some financial institutions adhere to is the Sustainability Linked Loan Principles (SLLP), which is based on loan terms being aligned to the borrower's performance according to pre-agreed sustainability performance targets.
Conclusion – Where are we now?
While there is still no global legal framework aiming to reduce GHG emissions from ships, the recent developments make it unlikely that industry participants in the shipping industry can maintain their competitiveness in the long term if they do not invest in greener technology. Those wishing to engage in the lucrative trade routes that involve calling ports within the EU, will already have to comply with stricter environmental standards. Should the eventual IMO framework prove to be unsatisfactory, other jurisdictions might follow suit in taking unilateral action. Although the costs of fleet modernisation are significant, proactive shipping companies can now benefit from more favourable loan terms if investing in greener technology. In the long term, those who do not make the necessary green investments may prove to be less competitive, as their ships become less energy efficient, and they might face changing market expectations that could punish them. There is an exciting time ahead for sustainable shipping.
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