Climate transition could hit South Korean, Chinese, and European shipping financiers hardest

October 24 ------ European, Chinese, and South Korean financiers have over half of their portfolio tied to oil and gas carriers that are most at risk of becoming stranded assets in the global rush to shift to a low-carbon energy system, a new report by UCL’s Energy Institute Shipping and Oceans Research Group suggests.

As the global economy moves toward decarbonization, the maritime transport industry is staring at the abyss of stranded assets, i.e., vessels that lose value before the end of their operational lives, UCL’s report said. Yet, little is known about who ultimately bears the financial risks or how they might ripple through ship owners, operators and their financiers should they materialize.

Per the study, unlike in the fossil fuel or power industries, where stranded-asset risks have been widely studied, shipping remains ‘opaque,’ hampered by limited disclosure in vessel financing and the web of ownership as well as debt structures that mask who is ultimately exposed to danger.

“The gaps in data highlight an urgent need for much greater transparency in shipping finance. Whilst initiatives such as the Poseidon Principles have made an attempt at this, the climate alignment scores are aggregated at the portfolio level, meaning that data cannot be traced back to individual vessels,” Nishatabbas Rehmatulla, Principal Research Fellow at UCL Shipping and Oceans Research Group, stated. “Furthermore, they provide only an annual snapshot on GHG emissions intensity, but to really assess exposure to stranded asset risks, a more forward-looking understanding is needed,” Rehmatulla added.

As the report (which is said to have compiled information from over 3,000 financial transactions) has elaborated, while the vast majority of lenders maintain diversified portfolios across various shipping segments, some institutions have shown concentrated exposure to specific fossil fuel carrier types.

Within this context, researchers from the UCL Energy Institute have revealed that five financiers have over 50% of their portfolio tied to fossil fuel carriers, including China Merchants Group and Korea Eximbank (KEXIM), followed by mostly European banks like Standard Chartered, ABN AMRO, ING Bank, SEB, Nordea and SMBC who have over one-third of their portfolio tied to fossil fuel carriers. BNP Paribas, the financier with the ‘biggest’ portfolio recorded in the dataset ($9 billion), was reportedly also found to have almost a quarter of its portfolio invested in fossil fuel carriers ($2 billion).

In this sense, the largest economies financing liquefied gas tankers, thus, include the United States, South Korea, France, China, and the United Kingdom, while those financing oil tankers include China, the U.S. and Hong Kong, UCL’s report highlighted. To be specific, according to the study, South Korea, France, China, and the UK maintain a dominant spot in the financing of LNG carriers, with the first two heavily investing via bank loans. China, the U.S., and Hong Kong dominate oil tanker financing, with bonds being the preferred tool for Hong Kong, which is hailed as Asia’s leading bond issuance hub. South Korea is described as “most exposed to stranded asset risks” with nearly half of its maritime transport investments channeled toward LNG carriers.

“These risks exist regardless of the IMO’s adoption of the NZF. However, reflecting the NZF being delayed, this subject has now increased salience – regulation has not gone away but is now more uncertain. Understanding and managing that risk will now be of greater importance than ever, said Tristan Smith, Professor of Energy and Transport at UCL Shipping and Oceans Research Group.

The study has further shown that banks financing the fossil fuel-carrying fleet could be holding toxic assets, with financial arrangements of liquefied gas carriers of around $36 billion identified (only in reference to those where the analysis could match a lender with a ship). The UCL Energy Institute spotlighted that, among the identified transactions, loans represented over 50% of the amount ($21 billion), followed by direct ownership and leases ($11 billion) and equity ($7 billion).

As informed, for oil tankers, equity financing played a more ‘significant’ role, accounting for about 40% of the total of $35 billion identified transactions. Meanwhile, bank loans represented around the same amount ($14 billion). Per UCL, this means that the risks do not only sit in the loan portfolio of banks, but that a large portion is spread across global capital markets. To remind, a previous report by the institute, released at the end of January this year, demonstrated a similar reality in regards to stranded assets. The study had underscored that gas carriers and oil tankers were particularly exposed to this demand-side risk.

It stressed that over a third of the world’s fleet (with over 40% of these units transporting fossil fuels globally) faced premature scrapping unless it underwent costly retrofits to remain competitive in the wake of new greenhouse gas (GHG) policies and the broader energy transition. The latest study has, therefore, once again emphasized that, to maintain a livable planet as stated in the Paris Agreement’s climate goals, demand for fossil fuels must decline.

Source: offshore-energy.biz