On 18th June 2019, 11 banks with collectively over $100bn in assets and representing nearly 20% of the global ship finance signed a global framework agreement, called the Poseidon Principles. These are directed towards meeting the Paris Agreement’s target of below 2ºC and the International Maritime Organisation’s (“IMO”) target of cutting greenhouse gas emissions from global shipping by 50% by 2050 (compared to 2008 levels). The 11 Signatory banks will rely on the global Data Collection System for Fuel Oil Consumption by ships (“IMO DCS”) (see our previous article here) when assessing the carbon intensity of their related ship finance and will work together in promoting responsible ship finance. In this article we provide a brief summary and workings of the Poseidon Principles.
The Poseidon Principles Association is the governing body of the Poseidon Principles. It provides the management, administration and development of the Poseidon Principles. A secretariat maintains the day-to-day functions of the Association, and is the first point of contact for existing and prospective Signatories. The Secretariat is provided by the Global Maritime Forum through a service agreement. The technical expertise needed for the Principles is provided by Rocky Mountain Institute, University College London Energy Institute and Lloyd’s Register (and may include other organizations in the future as and when needed).
The 11 signatories are Citi Bank, Société Générale, DNB, ABN Amro, Amsterdam Trade Bank, Credit Agricole CIB, Danish Ship Finance, Danske Bank, DVB, ING and Nordea. It may be that more banks will sign up to the Principles in the future.
Responsible ship financing
Global shipping accounts for around 80% in volume, and 70% in value, of transport of all world traded goods. IMO projections suggest that business-as-usual GHG emissions from maritime shipping will increase between 50% and 250% in coming decades. Clearly this does not align with the overall aims of the Paris Agreement, albeit shipping was not included in the Paris Agreement. In April 2018 the IMO took steps to persuade its members to agree to (a) reduce the total annual GHG emissions by at least 50% by 2050 compared to 2008 (“the IMO Absolute Target”) and (b) to reduce CO2 emissions per transport work (grams of CO2 per tonne-nautical mile [gCO2/tnm]) by at least 40% by 2030 pursuing efforts towards 70% by 2050 (compared to 2008 levels, (“the IMO Intensity Targets”)). It is against this global GHG emission reduction framework that the Principles are to be applied by the Signatories when measuring the carbon intensity of their related ship financings.
There are four principles that make up the Poseidon Principles. These are “Assessment”, “Accountability”, “Enforcement” and “Transparency”.
Principle 1: Assessment of climate alignment
Under Principle 1 Signatories commit to “annually assess climate alignment in line with the Technical Guidance for all Business Activities.” The Technical Guidance provides different methods on how assessment is to be made and what the term “Business Activities” entails. In order to measure the carbon intensity and climate alignment of a vessel, Signatories must rely solely on (a) the Carbon Intensity and the Climate Alignment Certificate issued by an IMO Recognised Organisation (e.g. independent verifiers authorised by Flag States) and (b) on the verified IMO DCS data (i.e. data for which a Statement of Compliance has been issued by the IMO to the vessel) (see our article here). This data is then measured against the standard decarbonization trajectories provided by the Poseidon Principles Secretariat. A decarbonization trajectory is a representation of how many grams of CO₂ a single ship can emit to move one tonne of goods one nautical mile over a particular time horizon. The decarbonization trajectory must meet the IMO ambition of reducing total annual GHG emissions by at least 50% by 2050 (based on 2008 levels).
Principle 2 – Accountability
Under Principle 2 Signatories commit to rely solely on the independently verified and approved data as certified by virtue of (a) Carbon Intensity and Climate Alignment Certificates; and (b) the Statements of Compliance issued under IMO DCS. The first set of fuel consumption data from the first compliance period are to be reported to Flag States by the end of March 2020. These will be instrumental in informing the Signatory lenders about the carbon performance of their related shipping.
Principle 3 – Enforcement
Principle 3 seeks to provide an enforcement mechanism to ensure compliance by Signatories with the Poseidon Principles and to ensure that the various disclosure and information requirements are met. Once IMO DCS data is submitted to the IMO, it is anonymised and shipowners, strictly, are not obliged to share this information with any third parties, including their ship financers. This conceivably could cause the Signatories difficulties in assessing the climate alignment of their related shipping. To mitigate this difficulty, the Principles require Signatories to use ‘best efforts’ to include a ‘standard covenant’ in each of their new finance agreements requiring shipowners to provide them with their fuel consumption and other relevant data. The wording of the standard covenant has been provided by the Secretariat. To view an example of a Poseidon Principles Standard Covenant Clause click here. Of course the clause may not be suitable for every scenario, in which case legal advice may be required.
Principle 4 – Transparency
The fourth Principle is Transparency. This commits lenders to publicly acknowledge, no later than 30 November each year, their status as a Signatory to the Poseidon Principles, to report the overall climate alignment of its related shipping portfolio and supporting information to the Secretariat, and to publish the overall climate alignment of its shipping portfolio in relevant institutional reports on a timeline appropriate for that Signatory. Climate alignment scores will be published on Poseidonprinciples.org by 31st December each year.
Whilst the Poseidon Principles are a voluntary initiative, the ultimate goal is to create a new standard that may be adopted by many more lenders and ultimately create more favourable rates for lower carbon vessels. Of course many will want to see how the Principles work in practice, not only in terms of the relationship between banks and ship owners but also with an eye to how useful the Principles will be in a world where carbon reporting appears to be generally on the increase.
Further details on the Poseidon Principles can be found here.