Towards A More Sustainable Shipping Industry – Where Are We Now? – Transport

Recent years have seen an increased awareness of sustainability
issues by governments, international organisations, financial
institutions, investors and consumers, also affecting the maritime
sector.

Introduction

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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