By Eric Pedersen, head of responsible investments at Nordea Asset Management
Maritime transport is the backbone of international trade and is an integral part of the global supply chain – transporting raw materials to refineries, refined goods to factories and manufactured items to consumers. In fact, shipping accounts for about 80-90% of global trading activity, with its cargo carrying capacity doubling since 2005.
For those not fully aware of the importance of this cost-effective mode of trade, the current global supply chain crisis must be an eye opener. Due to the rise of the Covid-19 Delta variant, a number of high-volume shipping ports in China were forced to close in recent months – while spiking cases in places like Vietnam and Malaysia decreased manufacturing capacity and depleted workforces at busy container ports. In addition, who could forget the six-day blockage of the Suez Canal earlier this year, after the grounding of the Ever Given container ship? As a result of these bottlenecks, thousands of cargo containers have been left dormant for days and weeks at major ports, exacerbating the shortages currently witnessed on consumer shelves and factory floors.
While the often-ignored shipping space has recently hit the headlines, it has long been an industry ESG investors have watched intently. Shipping is governed by numerous rules and regulations – in areas such as safety of life at sea and the protection of the marine environment, as well as the provision of decent working and living conditions for seafarers. In our ESG analysis of companies in the shipping sector, we evaluate a variety of risks – such as greenhouse emissions and other environmental impacts, employee health and safety, accident and safety management, and corporate governance.
Corporates enacting change
Even though shipping is one of the least emission-intensive modes of transporting goods – compared to trucking or aviation, for example – it is still among the largest carbon emitters, with more than one billion tonnes of greenhouse gas emissions each year. This is similar to the total carbon emissions of Germany. If left unchecked, emissions are tipped to double by 2050.
However, unlike other modes of transport, long haul shipping faces a challenging path to electrification, due to the large quantities of energy required over extended time periods. Positively, there has been some progress towards cutting emissions with advances in green hydrogen and ammonia. For example, Norwegian chemical company Yara International is a leader in green ammonia, while Aker Carbon Capture and Aker Clean Hydrogen are becoming key players in these important niches. While innovations in such areas will be vitally important to the shipping industry in the decades ahead, broad application of these technologies will take several more years to come to fruition.
Nevertheless, shipping groups are not simply treading water. Norwegian vessel owner Klaveness Combination Carriers is leading the way in terms of improving current emissions within the shipping industry. By designing vessels able to operate as both bulk ships and product tankers, Klaveness virtually eliminates repositioning of its vessels between journeys. For conventional bulkers and tankers, this would typically equate to about 50% of the total distance sailed. While these advanced vessels are more expensive to build than conventional bulkers and tankers, the emissions per tonne of freight moved and the return on capital over time are superior due to the fact cargo is carried both ways of the journey.
Denmark’s Maersk, the world’s largest container shipping line and vessel operator, has also shown a willingness to accelerate the decarbonisation of its fleet, by recently ordering a number of vessels able to run on carbon-neutral methanol. Maersk sees green ammonia as an important future fuel too, and has backed plans to build Europe’s largest green ammonia facility on the on the Danish west coast.
In addition to positive developments in cleaner fuel and vessel design, we are also seeing improved onboard energy efficiency and resource efficiency. At Nordea, we have an investment in Alfa Laval, which manufactures hardware vital to the operation of a vessel’s engine room. The Swedish company sees significant opportunities in providing sustainable solutions in the areas of water treatment, energy efficiency, emissions curbs, and broader pollution reduction.
Engagement and collaboration
There are many ESG elements an asset manager must consider in the maritime space – in areas such as ship recycling, crew and yard workers rights, cargo safety, and the obvious environmental concerns. Through our ESG engagement with Klaveness, we have been pleased with its commitment and progress in terms of sustainability since its IPO more than two years ago.
However, in such a global industry, it is important to seek change beyond individual corporate engagement. Industry collaboration is crucial, as evidenced by the Responsible Ship Recycling Standards initiative undertaken by a group of financial institutions. These principles aim to minimise the dangers associated with the dismantling of vessels – including labour conditions and environmental impacts. The Poseidon Principles is another global initiative, which provides a framework for integrating climate considerations into the lending decisions of institutions operating within the shipping space.
While it is likely to take many more years before shipping experiences an automotive-like sustainability revolution, there are still many courses ESG investors can chart to promote environmental and societal advances in this crucial global industry.