It is sadly rare to see participants from across the world collaborate to achieve a common and worthy aim, and rarer still to see such collaboration driven by the private sector.
But when it comes to tackling climate change, such global collaboration has never been more vital.
That makes the Poseidon Principles particularly welcome. This is a new initiative of 11 banks (Citigroup, Societe Generale, DNB, ABN Amro, Amsterdam Trade Bank, Credit Agricole CIB, Danish Ship Finance, Danske Bank, DVB, ING and Nordea), which aims to address this most pressing global challenge: how to decarbonise our economies while still supporting growth and prosperity.
To limit global warming to well below two degrees celsius, the world must reach net-zero CO2 emissions by mid-century. Huge attention has been focused on the decarbonisation of electricity generation and how to foster rapid growth of renewables. But by contrast, there has until recently been less focus on how to reduce emissions from sectors such as cement, steel, aviation, and maritime shipping.
One of the most challenging of these sectors, maritime shipping, currently represents two to three per cent of CO2 emissions, according to the UN’s International Maritime Organisation (IMO). Left unchecked, shipping emissions are expected to grow by 50-250 per cent by 2050, putting the sector on track to become a major contributor to climate change.
Fortunately, there is hope. In the 2018 Energy Transition Commission’s Mission Possible report, we showed that it is technically and economically viable for the global shipping industry to reach net-zero CO2 emissions by mid-century. For while improved engine efficiency and new zero-carbon fuels will be expensive, the impact on costs for consumers of goods traded across the world will be quite small – for example, full decarbonisation of global shipping might increase the cost of a £50 pair of jeans by just 25p.
There are, of course, challenges in decarbonising this vital industry, which carries 90 per cent of all global trade. Shipping has complicated contracts that create split incentives between those who own ships and those who operate them and pay for fuel. As a result, competition does not fully reward those who take action to cut emissions.
But despite these challenges, the Poseidon Principles have taken shape, with a growing number of global financial institutions combining to create a clear framework for assessing how well their shipping business aligns with climate change goals.
These principles can be used by any lender, lessor, or guarantor providing financial services for shipping. They establish a simple, robust, and verifiable way to measure the climate alignment of financial institutions’ shipping portfolios.
Financial institutions that have signed to the Poseidon Principles will annually assess whether the ships they finance are compatible with the IMO’s climate target of reducing emissions by at least 50 per cent by 2050.
This will help change how financial institutions assess clients and projects and set expectations for decarbonisation plans in the short and long term.
And that’s good news, because the newbuild vessels financed today may be on the water until 2045.
The financial sector cannot drive change alone.
The effectiveness of the these principles depends on the policy decisions and targets set by governments at the IMO, ensuring that finance flows most easily to those ship-builders, owners, and operators who most clearly pursue decarbonisation.
The Poseidon Principles may therefore establish a model that could be applied in other sectors.
It is vital for financial institutions to support investment in new activities which are essential to a zero-carbon economy, such as renewable energy. But they also need to play a proactive role in aligning all of their financing activity across multiple sectors with climate change-related goals.