The Poseidon Principles Association, a group of major marine shipping banks, released its first Annual Disclosure Report in December 2020. This report discloses the "climate alignment score" of fifteen banks' ship finance portfolios, and signals the increasing importance of sustainability disclosure, climate change mitigation and energy transition considerations in marine finance.
The Poseidon Principles are a marine shipping sector-specific framework for banks to quantify and disclose greenhouse gas (GHG) emissions. Banks and other shipping industry stakeholders established the Poseidon Principles in 2019 to assess ship finance portfolio alignment with the International Maritime Organization's (IMO) GHG emissions reduction targets. The IMO's "Initial GHG Strategy" calls for reducing total GHG emissions attributable to the international marine shipping sector by at least 50% by 2050 compared to 2008.
The Poseidon Principles includes standardized methods for participating financial institutions to calculate and report on their activities' alignment with the IMO's Initial GHG Strategy. The Poseidon Principles do not require that participating banks reduce GHG emissions from their shipping portfolios. Instead, the Poseidon Principles require participating banks to annually measure and report the overall "climate alignment" of their shipping portfolios. Participating banks must apply the Poseidon Principles in loans secured by title over vessels that fall under the purview of the IMO (i.e., vessels 5,000 gross tonnage and above engaged in international trade). Through standardized covenants in credit agreements, banks require borrowers to provide the banks with the information the banks need to conduct the "climate alignment" measurement and reporting that banks must do to comply with the Poseidon Principles.
The Poseidon Principles Association Annual Disclosure Report 2020, released in December 2020, is the first time participating financial institutions have publicly disclosed this "climate alignment". In the report, fifteen banks, most of which became participating institutions in 2019, disclose the "climate alignment" of their portfolios for 2019.
The report assigns a "climate alignment" score to each bank's portfolio. A "climate alignment" score of 0% represents a lending portfolio that is "in line with the decarbonization trajectory threshold" or "climate aligned." A negative score indicates a lending portfolio's "carbon intensity is lower than required by the decarbonization trajectory" or "climate misaligned." The average score was +1.2%, with scores ranging from -44.92% to +32%. According to these scores, the portfolios of three banks are aligned with the IMO's Initial GHG Strategy, while the portfolios of the remaining reporting participating institutions are not.
The report also includes commentary from banks on key takeaways from their climate assessment, and reflections on how it will inform their business activities and decision-making in the future. The Poseidon Principles Association states in the Annual Disclosure Report 2020 that "this first climate assessment reporting provides Signatory financial institutions with a unique understanding of their ship finance portfolios' climate footprint, and it enables financial institutions under the Poseidon Principles to work proactively with their shipping clients and other important stakeholders to shape a better future for international shipping and society." The commentary from participating banks includes notable statements regarding financial institutions' commitments to decarbonization efforts, the influence of sustainability parameters on lending decisions, how banks want to contribute to the international effort to address climate change, and how the Poseidon Principles will continue to impact decision making for financings.
A copy of the Annual Disclosure Report 2020 can be found here.
1 "Climate alignment" is defined as the degree to which a vessel, product, or portfolio's carbon intensity is in line with a decarbonization trajectory that meets the IMO ambition of reducing total annual GHG emissions by at least 50% by 2050 based on 2008 levels. The Poseidon Principles rely on the Annual Efficiency Ratio as a carbon intensity metric. The Annual Efficiency Ratio uses the parameters of fuel consumption, distance travelled, and deadweight tonnage at summer draught. A decarbonization trajectory is a representation of how many grams of carbon dioxide a single ship can emit to move one tonne of goods one nautical mile over a time horizon. Standard decarbonization trajectories are produced by the Secretariat of the Poseidon Principles for each ship type and size class. To assess climate alignment of a single vessel, the vessel's annual carbon intensity is compared with the decarbonization trajectory for its ship type and size class. The climate alignment of a lending product or portfolio is a weighted average of the vessel carbon intensities in each product or portfolio.