Setting a course for net zero: opportunities for investors in maritime decarbonisation

This blog was co-authored by Andrew Howell, CFA, Environmental Defense Fund.

Aligning the maritime shipping sector with the Paris Agreement’s 1.5°C target requires an all-hands-on-deck approach. This includes financial institutions, given the important role that finance plays in the real economy.

Maritime shipping touches around 90% of globally traded goods¹ and is responsible for close to 3% of global greenhouse gas (GHG) emissions.² Rising demand for global freight means that maritime trade volumes could double by 2050, according to the International Renewable Energy Agency.³

Anchors aweigh

Earlier this year, the International Maritime Organization (IMO) revised its GHG emission strategy to put the shipping sector on a path to net-zero emissions by, or around, 2050. This is a welcome step to accelerate the pace of industry decarbonisation, even if it falls short of the ambition needed to achieve full alignment with the Paris Agreement.

In response to heightened IMO ambition, finance sector stakeholders are updating their own plans. The Poseidon Principles, a banking coalition for shipping finance that represents $100 billion in loans⁴, recently updated its framework to align with the IMO target, and signatories will be expected to release climate scores for shipping companies benchmarked against the new target.   

We believe asset managers can also benefit from encouraging shipping industry leadership on the path to a clean energy transition. The new IMO strategy⁵ calls for a minimum 5% uptake by 2030 of zero or near-zero GHG emissions technologies, fuels and energy sources – and encourages the sector to strive for a 10% uptake.

To achieve this, shipping companies will need to set clear transition plans, allocate capital to achieve the required emissions reductions, and collaborate with stakeholders along the value chain. Financial sector support is crucial to help companies reshape their fleets and maritime infrastructure. Companies that fail to decarbonise expose their owners and lenders to technological, financial and reputational risk, and face a more disorderly and costly transition.

Turning the tanker around

The long timescales required to turn over fleets and develop new fuelling infrastructure means that asset managers should encourage companies involved in shipping to take action today, in our view. LGIM does this in two ways. First, by setting and disclosing expectations for shipping along with other climate-critical sectors, and second, by engaging directly with influential companies through an engagement campaign called the Climate Impact Pledge (CIP).

Through the CIP, LGIM sets expectations for shipping companies, including a net-zero target, low-emission and fleet renewal plans, and disclosure of climate-related lobbying activities. Under a model of ‘engagement with consequences’, companies that do not meet LGIM’s red lines may be subject to voting and/or divestment sanctions. Voting sanctions are applied across all of LGIM’s funds where LGIM maintains vote discretion, and divestment sanctions are applicable across more than £158 billion of assets as of June 2023.⁶

Sounding the horn on transition risk

In line with the IMO’s new GHG strategy, LGIM has updated its assessment framework and evolved its minimum expectations for shipping companies.

Frameworks such as the CIP allow institutional investors to systematically communicate their expectations to management teams and signal the importance of managing transition risk across industries. We believe the finance sector’s active engagement with the shipping sector can potentially drive company performance improvement as well as support a successful transition.

The new IMO revisions have set a clear decarbonisation ambition for the shipping sector, and action by investors, alongside other stakeholders, is required to turn the tide.

Key Risk Warnings

Past performance is not a guide to future performance. For professional investors only. The value of investments and the income from them can go down as well as up and you may not get back the amount invested. The details contained here are for information purposes only and do not constitute investment advice or a recommendation or offer to buy or sell any security. The information above is provided on a general basis and does not take into account any individual investor’s circumstances. Any views expressed are those of LGIM as at the date of publication. Not for distribution to any person resident in any jurisdiction where such distribution would be contrary to local law or regulation. This financial promotion is issued by Legal & General Investment Management Ltd. Registered in England and Wales No. 02091894. Registered office: One Coleman Street, London EC2R 5AA. Authorised and regulated by the Financial Conduct Authority.

1. Source: https://www.ics-shipping.org/shipping-fact/shipping-and-world-trade-world-seaborne-trade/

2. Source: https://www.reuters.com/sustainability/climate-energy/shipping-industry-off-track-meet-5-zero-emission-fuel-target-by-2030-2023-10-18/

3. Source: https://www.irena.org/-/media/Files/IRENA/Agency/Publication/2021/Oct/IRENA_Decarbonising_Shipping_2021.pdf 

4. Source: Poseidon Principles data as at June 2019

5. Source: 2023 IMO Strategy on Reduction of GHG Emissions from Ships

6. LGIMs Climate Impact Pledge 2023