While the outbreak of the Covid-19 pandemic has affected the global shipping industry, it has not derailed implementation of stricter environmental, social, and governance (ESG) regulations that are pushing investors to finance only less pollutive and more fuel-efficient ships or “clean” vessels.
The reason is IMO 2020, a new International Maritime Organization (IMO) regulation that took effect on January 1 2020, setting the maximum limit of sulphur content of marine fuels at 0.5%. The objective of the regulation is to reduce the air pollution created in the shipping industry by reducing the sulphur content of the fuels used by its ships and vessels plying the waters of the world.
The IMO is the United Nations body for the global shipping industry. In April 2018, it adopted targets aimed at reducing the industry’s greenhouse gas emissions by at least 50% before 2050 compared with those of 2008.
“What we’re seeing in terms of capital flow both from an equity perspective and from a debt perspective is that capital is very much aligned with companies that have a very prime focus on pursuing these technological innovations that improve fuel consumption,” says Andrian Dacy, global head of Transportation J.P. Morgan Asset Management. “We’re not seeing capital going to older vessels, it’s really focused on the newer ones.
“The shipping industry accounts for about 3% of global carbon emissions. So, if that can be reduced by 50% to 1.5%, or even better, that’s a positive thing.”
To comply with the more demanding fuel emission standards set by IMO 2020, vessels can either switch to low sulfur fuels or they can install exhaust gas cleaning systems, also known as scrubbers, to reduce their emissions of sulfur oxide and nitrous oxide. Over the past year, ships have been taken out of the market to install scrubbers.
“We expect these trends will continue in 2020, reducing industry-wide supply growth and providing support for rates,” Dacy notes. “We also anticipate that a number of older, less fuel-efficient ships will be demolished, further limiting supply.
“Finally, we project that average vessel speeds will slow to reduce fuel consumption. Such decreases in vessel speeds lead to supply contraction as vessels take longer to complete voyages, thereby supporting market rates.”
The shipping industry accounts for 90% of global trade, with its ships moving commodities like oil, iron ore and grain, and the vast majority of manufactured goods globally.
The industry’s 3% contribution to the world’s pollution is comparable to major emitting countries. “However, this industry is beginning to imagine a much cleaner future, with the help of investors who are financing greener investments,” Dacy states. “Protecting the environment has become a key consideration for extending shipping loans and investment.”
Even with the pandemic, trade continues to be a very important part of the global economy. For example, Chinese port volumes are about 110% above 2019 levels as of June 2020 despite the US-China trade war.
“Global trade oddly enough has not been that impacted by Covid-19 and the trade war,” Dacy points out “In some ways, the [Asian] region has strengthened with people ordering online and having goods delivered to their homes as opposed to going to shops. That is the broader recent economic development.”
Even as global transportation investments have grown in size and stature, the real asset class remains little known to institutional investors. Driven by decades of globalization, the diversity of transport assets has increased dramatically.
Transport assets, ranging from vessels and aircraft to rail and trucking, are integral components of global trade. While some of these assets provide attractive opportunistic returns, a significant part of them are seen as core-plus portfolio investments, characterized as capital intensive, stable, low leverage, and long-term income generators for high-quality end users.
