Issue 2/2023
The Shipping and Maritime industry is subject to several sustainability regulatory frameworks, some mandatory and some voluntary. At the same time, new sustainable finance initiatives are expected to have direct and indirect impact on information that companies in the industry will be required to report on, or consider in their business. This newsletter focuses on the relevant European Union sustainability frameworks for the Shipping and Maritime sector.
Decarbonization and the shift towards more sustainable shipping practices is becoming an important topic in the shipping and maritime sector, due to the significant greenhouse gas emissions that the industry generates, and the need to reduce these emissions in order to address climate change. This is increasing the pressure from governments, regulators, and environmental groups to reduce these emissions which is driving the industry to find more sustainable ways of operating.
At the same time, pressure from society for more sustainable business practices is growing. Consumers, for example, are becoming increasingly aware of the environmental impact of their purchasing decisions. There is evidence that this has an impact on purchasing decisions, which is in turn leading to a rising demand for sustainable logistics options from retailers and other companies.
In response to a rapidly changing global environment, new standards, tools and methodologies for sustainable shipping practices have been developed, such as the Clean Shipping Index (CSI), an independent labelling system of vessels’ environmental performance and the Green award scheme which is a certification scheme rewards ship management companies with at least one ship that meets specific green requirements. Although sustainability reporting is still largely voluntary, an increasing number of regulations around the world require adherence to and disclosure on Environmental, Social and Governance (ESG) issues.
In this Newsletter, we look at the main sustainability frameworks set by the European Union, affecting the Shipping and Maritime sector.
European Green Deal
The European Green Deal is the European Union’s plan to transition to a sustainable and fair economy, includes ambitious targets to tackle climate change. Ultimately, the EU is aiming to reduce greenhouse gas emissions by 55% in 2030 and become net zero by 2050. In particular, the European Commission intends to make Europe the first carbon neutral continent by 2050.
EU Sustainable Finance Strategy
Sustainable finance is integral to how the EU will deliver on its policy objectives under the European Green Deal. The EU Sustainable Finance Strategy determines at how finance will support sustainable economic growth in a socially just manner, while reducing impact to the environment by considering sustainability aspects when making investment decisions assessing risks, marketing products and framing company reward structures. Sustainable finance has a key role to play in delivering on the policy objectives under the European Green Deal by channeling private investment into the transition to a climate-neutral, climate-resilient, resource-efficient and fair economy.
The main frameworks stemming from the European Green Deal, that are relevant to the Shipping and Maritime sector are the Taxonomy Regulation (“Taxonomy”) and the Corporate Sustainability Reporting Directive (“CSRD”).
Taxonomy Regulation
The EU Taxonomy is the cornerstone of the EU Green Deal. It is essentially a classification system that establishes a list of environmentally sustainable economic activities and is intended to channel capital flows towards sustainable investments, functioning as a transparency tool.
The Regulation and the delegated acts have been in force since July 2020 and the basis has been established for the EU taxonomy by setting out four overarching conditions in order to the economy activity to meet and qualify as an environmentally sustainable option: a) Must substantially contribute to one or more of the environmental objectives; b) do no significant harm (DNSH) to any of the other environmental objectives; c) be carried out in compliance with minimum social and governance safeguards and d) comply with technical screening criteria, which the climate delegated act sets out in relation to climate change mitigation and climate change adaption.
Companies not meeting the Taxonomy requirements may face increasing difficulty in accessing new capital and financing. Given the maritime industry’s capital-intensive nature, this might become a significant restriction in the near future.
Corporate Sustainability Reporting Directive (CSRD)
The CSRD amends the existing non-financial reporting requirements set for companies under the Non-Financial Reporting Directive (NFRD). It substantially increases reporting requirements on companies falling within its scope, which are required to provide detailed disclosures in their management report regarding the impact that their activities have on sustainability matters. This concerns the policies they implement in relation to social responsibility and treatment of employees; respect for human rights; anti-corruption and bribery; and diversity on company boards (in terms of age, gender, educational and professional background).
Approximately, 50.000 companies are expected to be affected, with the CSRD applying to all large EU companies (including EU subsidiaries of non-EU parent companies) and to all companies with securities listed on EU-regulated markets, irrespective of whether the issuer is established in the EU. This includes listed small and medium size enterprises but excludes certain listed micro-enterprises. In addition, the CSRD applies to non-EU companies with annual EU-generated revenues in excess of €150 million and which also have either a large or listed EU subsidiary or a significant EU branch (generating €40 million in revenues).
The directive will be adopted in a staged approach, with 2028 being the ultimate deadline for adoption for all entities in-scope.
How can we help
ESG factors can present both challenges and opportunities for a bank’s assessment of its asset quality, capital strength, profitability, liquidity and funding. Banks need to map the obligations that they and their divisions (e.g. lending, corporate finance, wholesale markets, asset management and private banking) are subject to across the ESG framework in order to:
- Manage the risk of conflicting or inconsistent information being disclosed
- Ensure consistency and/or alignment of disclosures
- Identify the overlaps in the reporting pillars where common reporting metrics can be leveraged
We meet forward-thinking companies where they are on their ESG journey, to develop industry-focused strategies that align with their vision. We remain by their side every step of the way, from inception to implementation and ongoing monitoring.
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