LNG-powered vessels are likely to find favorable treatment from lenders under the Poseidon Principles, according to a new study by Sea-LNG. Sea-LNG is a multi-sector industry coalition that was founded in 2016 to advocate for the use of LNG over conventional marine fuels. Its members include a diverse assembly, including owners, charterers, brokers, banks, and classification societies, as well as ports, upstream suppliers, infrastructure providers, and original equipment manufacturers (OEM).
The Poseidon Principles represent a commitment by leading financiers in the shipping industry to improve the emissions profile of their portfolios. Its signatories include 18 major banks representing $150 billion in shipping finance. Membership is open to lenders, lessors and export credit agencies. Signatories commit to assessing the alignment of their shipping portfolios with the IMO’s emissions targets using a metric called Average Emissions Ratio (AER), which measures carbon intensity. The lower carbon intensity or “AER” of LNG-powered vessels makes it easier for signatories of the Poseidon Principles to maintain compliance with the IMO’s emissions regulations. This principle of “assessment” (along with the principles of accountability, enforcement and transparency) apply to credit secured by vessel mortgages, finance leases secured by title, and any vessels that fall within the purview of IMO regulations.
By financing LNG-powered vessels, forward thinking lenders can improve their alignment with the IMO’s emissions goals. In January of 2020, new IMO sulfur oxide emissions regulations came into effect that cap the sulfur content of marine fuel at 0.50%, down from 3.5% (except in certain designated Emissions Control Areas, where the limit is already 0.10%). Owners of LNG-powered vessels avoided the costs and anxieties of switching to low-sulfur fuel or installing “scrubbers” to cleanse exhaust. Their virtually sulfur-free mode of propulsion easily exceeds the new requirements.
In the coming years, LNG-powered vessels will maintain compliance with the IMO’s emissions goals for several years longer than vessels that use conventional marine fuels. The IMO’s future emissions targets will focus on carbon dioxide (CO2) and greenhouse gases (GHG). By 2030, the IMO aims to reduce CO2 emissions from international shipping by at least 40% in comparison with 2008 levels. By 2050, the goal is to reduce CO2 emissions by at least 70%. For all GHG, the goal is to reduce emissions by at least 50% by 2050 and for emissions levels to peak (or begin declining, in other words) as soon as possible.
According to the study, LNG-powered vessels have 28% lower CO2 emissions from tank to wake, which translates into an additional seven years of compliance with IMO emissions goals. By examining SEC filings, the study also found that LNG-powered vessels enjoy a discount of 1-2% on loan rates compared to vessels that use conventional marine fuels. In short, not only do LNG-powered vessels have lower emissions, their owners also pay lower interest rates in financings.
Environmental, Social & Governance (ESG) concerns remain critical in international shipping. The urgency continues to build as the 2030 IMO target for reducing CO2 and GHG approaches. It is gratifying to see that financiers have rewarded the choice of LNG-powered ships with lower interest rates for borrowers. That finding suggests that banks are in fact passing on the benefit of increased demand for sustainable financial products to their clients. Vessel owners that have made the investment in LNG-powered vessels and retrofits will welcome the savings on capital costs. Hopefully the trend towards green financing and cleaner fuels will continue apace with the growing demand for ESG-friendly financial products.