Shipping Finance Driven by Eco-Metrics

The incorporation of efficiency data in making financing decisions is a dramatic market shift in recent years.

Banks have begun stating that they have seen the formation of a two-tier market, comprising high and low efficiency vessels, with eco-efficient vessels demanding premium prices upon initial construction, while being more likely to be chartered and maintain asset value over time, in addition to supporting a longer lifespan. The Carbon War Room (CWR) noted that large banks, including HSH Nordbank and KfW IPEX-Bank, are promoting the practice of consulting energy-efficiency data when making investment and financing decisions according to the "A to G" GHG Emissions Rating system.

The GHG Emissions Rating system, developed cooperatively with independent ship vetting company RightShip, currently ranks vessels according to comparative carbon dioxide emissions on a scale from "A to G." The benefits of using such a system include reductions in emissions, the opportunity for charters to align vessel selection with company sustainability standards while reducing bunker bills, and the recognition of sustainable operators through a greater acceptance of their ships, with fast and easy access to data that had previously been costly to gather together. The banks surveyed by CWR have indicated that vessel efficiency rankings now form an important part of assessing risk and return, with inefficient vessels now representing a higher-risk investment. Energy efficiency data is also being used in credit-approval processing for vessel purchasing, loan assessments for retrofitting projects, and re-selling or scrapping decisions, with banks citing efficiency as a key indicator for a vessel's profitability. Carsten Wiebers, the Global Head of Maritime Industries

“As a consequence of the correlation of energy efficiency and loan risk, we have analyzed our shipping portfolio based on the methodology of the Energy Efficiency Design Index (EEDI) and implemented design efficiency criteria in our credit approval process. In view of the beneficial risk profile and environmental benefits, we favor eco-ships over ships with poorer energy efficiency. We see a clear trend towards a two-tier market of high and low efficiency vessels, with energy efficient vessels being in the possession of enhanced marketability as well as higher revenue potentials for ship owners, as well as a more favorable risk profile for financiers."

Last year, KfW IPEX-Bank revealed that efficient container vessels of comparable capacity consume 30% less bunker fuel than inefficient vessels at the same operating profile. This represents a significant cost advantage, particularly if competing vessels are switching to more expensive distillate fuels in Emission Control Areas. Ingmar Loges, Global Head of Shipping at HSH Nordbank, additionally stated:

“The considerable influence energy efficiency can have on the profitability of shipping operations has integrated the evaluation of energy efficiency into [our] credit decision-making process. [Our company] uses efficiency rankings, such as the GHG Emissions Rating, as an initial foundation for systematically analyzing the advantages of efficiency retrofits and additional risks stemming from poor efficiency. [We] can also supply financing for a retrofit, when its analysis of the "A to G" Rating, and other vessel data, finds retrofitting to be a viable and desirable option, and if certain general conditions are fulfilled.”

The existence of a two-tier market is becoming increasingly evident: 25% of the non-container charter market vet potential vessels for efficiency before charter, and recent RightShip data analysis shows that the average lifespan of an "A" rated vessel is likely to be up to eight years longer than that of a “G” rated vessel. In addition, as recently as 2014 the Port Metro Vancouver, the Port of Prince Rupert, and the Port of Barbados began to use the GHG Emissions Rating scale to offer financial incentives to owners of more efficient vessels entering their ports.

Each individual vessel in the global shipping industry’s fleet of over 90,000 vessels represents a multi-million dollar investment. Ship owners and operators rely on the banking sector to ensure they can build, buy, upgrade, and maintain these assets. This means that leading shipping banks have a huge influence on the way the market moves and develops. Therefore, each bank must carefully control its market exposure as efficiency quickly becomes a key measure within the shipping industry.