New study suggests banks provide cheaper loans to greener shipping companies, but not greener ships

 

 

A new study by UCL Energy Institute on the relationship between financing terms and climate performance of shipping companies reveals what its authors terms as a “troubling trend” of green financing. 

The research paper in a sustainability journal shows that a ship’s carbon intensity does not directly impact the cost of the loan for that ship. Even post-Paris Agreement, although some banks reward companies with better climate scores, they do not distinguish loan terms based on individual ships’ carbon intensity. Loans represent a significant share of ship financing, and a large share of ships are financed through long-term loans, averaging seven years, so the risk of premature write-downs and stranded assets looms if stringent climate mitigation measures are implemented nationally and internationally.

Marie Fricaudet, PhD student at UCL Energy Institute, said “This study shows the ambiguity of the shipping lenders when it comes to climate risks. On the one hand, many acknowledge the need for shipping to decarbonise and our data shows that loan pricing now reflect the climate performance of the borrower. On the other hand, they are not directly supporting more carbon efficient ships with cheaper loans.”

The effects but also limits of disclosure initiatives like the Poseidon Principles, a framework for ship financiers to measure and disclose their shipping portfolio carbon intensity are becoming increasingly apparent. While companies with higher CDP scores secured cheaper loans when their lenders were Poseidon Principles signatories, these principles have not yet reduced the cost of debt for low-carbon assets. 

Banks are making decisions on a corporate basis rather than looking at individual assets

Dr Sophie Parker, co-author of the paper, said “The pricing behaviour we are seeing from the data largely reinforces our expectations that shipping banks are making decisions on a corporate basis rather than looking at individual assets. Even for the most climate aware banks in the Poseidon Principles, the data indicates that no carrots are being provided in terms of lower loan margins on less carbon intensive ships. This dynamic should change in the future as climate risk is baked into financial regulation that impacts credit risk practices and voluntary banking alliances put pressure on banks to deliver on their commitments.”

A significant portion of the fleet remains misaligned with the target to limit global warming to 1.5°C as shown in a previous UCL study. The IMO’s GHG strategy now commits it to reduce shipping emissions by 20-30% by 2030 on 2008 levels and to reach net-zero GHG emissions by or around 2050. Customer pressure from initiatives like the Sea Cargo Charter and Cargo Owners for Zero-Emission Vessels are further pushing for decarbonised shipping in the short-term. But, despite these pressures, around 30% of the fleet is dedicated to transporting fossil fuels, and fossil-fuelled ships still dominate new investments. If the carbon bubble bursts, these assets risk becoming stranded, potentially cascading financial losses onto shipping financiers.  

Professor Tristan Smith, co-author of the paper, said: “if shipping markets and finance are to avoid stranded assets and disruption/stability implications, then asset prices need to reflect the risk of misalignment with the rapid GHG reductions that are now a commitment of the IMO. This research evidences that the sector is not managing that risk at present, and that further efforts are needed”

The implications for the shipping industry and beyond are significant, the report maintains. 

“Climate performance is not merely an ethical consideration but a financial imperative. Companies that improve their climate scores can benefit from lower financing costs, enhancing their competitiveness and resilience in a climate-conscious market,” the report states. 

The failure to price in asset-related stranded asset risks reinforces the need for stronger disclosure initiatives, more rigorous monitoring, or more interventionist policies regulating the financial sector, the study urges. 

Recent policy discussions and initiatives, such as the EU’s Corporate Sustainability Reporting Directive (CSRD), Basel IV and the Green Deal, underscore the urgency for robust climate-related financial regulation and disclosure. Regulators have several policy options, from mandating emissions assessments for financed assets, imposing taxes based on portfolio emission intensity, to adjusting capital adequacy requirements via a green supporting factor or green monetary easing policies. The authors argue that these regulations should cover not only company emissions but also the emissions of financed assets. Public financial bodies can also play a role by providing guarantees or export credit facilities specifically to support cleaner technologies. This would link the cost of debt directly to the climate performance of both the borrower and the asset, driving the financial system to contribute to the transition to a low-carbon economy. 

Dr Nadia Ameli, principal research fellow at UCL Energy Institute, said “Despite the increasing emphasis on sustainability within the financial sector, established reputations often overshadow concrete climate performance. To catalyse the transition, voluntary commitments alone are insufficient. Rigorous regulations mandating emissions assessments and imposing tangible consequences for high-carbon portfolios are essential to ensure that financial institutions prioritise climate-friendly investments.”