Sustainable finance in growing exponentially across industries. Institutional investors and banks have earmarked hundreds of billions of dollars for ESG compliant investment and lending. In the maritime industry, many ship owners, yards and terminal operators have already secured or issued – green, sustainability-linked or transition – loans and bonds. They can benefit from a broader lender base, slightly better financing conditions and positive public perception.
Green finance is designed as asset finance with a defined use of proceeds. Vessels need to meet specific criteria outlined by organizations or standards like the Climate Bonds Initiative, the EU Taxonomy or the Green Shipping Programme. That typically means that the AER (Annual Efficiency Ratio) or the EEOI (Energy Efficiency Operational Index) need to be below defined decarbonization trajectories. The EU Taxonomy, however, also allows use of the EEDI (Energy Efficiency Design Index) and defines specific requirements for vessels retrofitting. In addition to the technical criteria for the vessel, the ship owner must also prepare a green finance framework that meets the requirements of relevant bodies such as the LMA (Loan Markets Association, for loans) and the ICMA (International Capital Market Association, for bonds).
Sustainability-linked finance is designed as corporate finance but can also be used for financing specific assets. The borrower or issuer of a bond commits to achieving a substantial improvement in one or more sustainability-related key performance indicators (KPI) over the short to medium term. The interest rate of the finance instrument is linked to whether or not the KPI are met. For example, a KPI might be an AER reduction of 60% between 2008 and 2030. Periodical reporting of verified performance is required.
Transition finance is designed as corporate finance but can also be used for financing specific assets. To be eligible, companies need a credible corporate decarbonization strategy that addresses climate risks in line with the Paris Agreement and achieves net zero in 2050, with tangible measures and milestones in the short and medium term. The Climate Transition Finance Handbook of the ICMA is often used as a reference.