Shipping banks should drive innovation with ‘smart’ capital

Bankers have an opportunity to help the industry adapt to the changing demands it faces, argues Paul Taylor, global head of shipping finance at Societe Generale

We can imagine a world of driverless cars, we hear stories of taxi drones being tested and read about 3D printing delivering tangible products without the need for transportation or a logistics chain. These vivid images obscure the reality that, behind these attention-grabbing headlines, a genuine shift in world energy is taking place, driven by the peak in oil demand rather than its supply.

We may be witnessing an irreversible energy transition, as many people move away from traditional fuels towards sustainable and greener energy sources at a speed that suggests demand will dry up before their finite supply.

But not only are perceptions towards protecting our planet changing, the very nature of the infrastructure that drives our daily lives is also experiencing a huge shift.

This change may seem like it has nothing to do with shipping and the financing transactions which underpin investment in vessels, but shipping is at the heart of this energy transition as investment decisions and operational concerns necessarily begin to focus on social and environmental factors.

While driverless cars and taxi drones might seem a world away from the choppy waters of the shipping world, coming developments in shipping regulation will have just as huge an impact.

The new rules, designed to promote sustainability, will see shipowners progress faster towards environmentally-sound transportation. This change is being welcomed by importers and exporters alike, supporting a greener logistics chain.

Bill Gates once said: “People always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10.”

In 10 years’ time the shipping industry — and the way shipowners and their financiers look at opportunities to grow — will be very different.

Regulatory shift

Two key IMO regulations calling for a 95% reduction in carbon emissions from individual vessels by 2020 have already been developed.

The Energy Efficiency Design Index is a mandatory requirement for new ships and the Ship Energy Efficiency Management Plan sets the standards required for existing vessels — both are already monitoring emissions ahead of the 2020 deadline.

In light of the changes taking place in shipping, financiers will have a responsibility to support their clients to make the most of the opportunities that present themselves, and this will require innovative solutions.

Beyond this responsibility, bankers obviously also need to consider the commercial perspective. The financial profiles of ships still powered by traditional marine fuels will necessarily change, but many of the implications of the new landscape remain unknown.

Will we experience a multi-tiered market when it comes to the value of ships? Will vessel lives and values vary according to their propulsion systems? Will charter rates and freight rates differ for environmentally friendly vessels? What will this mean for our lending portfolios?

Despite a recovery in some sectors, the shipping market is still generally weak, and now is a difficult time to persuade shipowners to invest heavily — whether in LNG-fuelled ships at an estimated extra 15% cost, scrubbers to filter out pollutants, or higher priced alternative fuels, not to mention the ballast water systems required under separate regulation.

Beyond the financial cost, which will run to many billions of dollars, there is a huge amount of work to be done before the 2020 deadline — and it is our responsibility to contribute.

As bankers we have an opportunity. There will be more consolidation and strategic advisory opportunities. Banks will need to innovate if they are to take a prominent role in the new landscape.

Banks need to support their clients through this change process, not with abundant lending, but by smart capital, innovative lending and capital markets to facilitate this investment.

Late last year, we were involved in financing the acquisition of an LNG-fuelled vessel for Brittany Ferries. Structured in conjunction with the European Investment Bank, the deal represented the first of its kind, but is representative of the way many transactions could look in the future.

At a broader level, we joined SEA\LNG, the industry body that is lobbying for the widespread adoption of LNG as a marine fuel. The supply of LNG is abundant and while adapting the vessels to be powered by it carries an initial cost, the fuel itself is cheaper in today’s market.

e0a8ab21f81eefc8c7704ca14a63711b Brittany Ferries' LNG fuelled newbuilding Honfleur, for which Societe Generale arranged financing Photo: Brittany Ferries

The SEA\LNG coalition features representatives from the global shipping and energy industries, but we were the first bank and remain the only financial institution to be involved.

While we are enormously proud of that, we would like nothing more than for other banks to join us, and shape the debate on how we can make LNG a widespread reality for vessels and their owners.

We cannot afford to wait and see. Shipowners need to adapt to these new regulations by 2020 and banks need to help them do it.

Beyond the regulations, it is vital that shipping is seen to be more agile, innovative, responsible and in line with public sentiment around the world. As financiers, we have a further responsibility to ensure our clients are equipped and enabled to thrive.

The new regulations are going to change shipping and all markets associated with it. The change is coming at a time when the industry is already facing challenges, but we have a duty to embrace it; once we have, we will be positioned to make the most of the opportunities that the new world offers.