Emanuele Caretti
CBA Studio Legale, Milan
emanuele.caretti@cbalex.com

Introduction

The Poseidon Principles are certain principles introduced by a group of leading banks operating in the shipping finance field worldwide. They have also created an association with the same name: the Poseidon Principles Association.

Membership of this association by other banks and financial institutions, and therefore compliance with the Poseidon Principles, is on a voluntary basis. The principles aim at the same targets that the International Maritime Organization (IMO) has set up itself, namely the reduction of greenhouse gas emissions and the reduction of environmental pollution by 50 per cent – in the period of time ranging from 2008 to 2050 – in relation to the vessels exceeding 5,000 gross tonnage.

Specifically, the association of the Poseidon Principles starts from a very simple assumption: reducing the pollution produced by ships (the pollution produced by ships is approximately two or three per cent of the pollution produced on a global scale). This is to be achieved by obligating the lenders to only finance ships that allow them to follow a plan to reduce the polluting ships they have in their portfolio (decarbonisation trajectory) which are established in advance by the association itself or by the IMO and are subject to change/adjustment.

As it is well known, ships are purchased or built in shipyards in most cases after financing by banks, financial leasing or any other form of financing.

The banks, the leasing companies or other financial institutions therefore have a portfolio of receivables in shipping which is linked (by means of security or the property, in the case of leasing) to the ships.

The Poseidon Principles consider such a portfolio of receivables, and therefore the connected ships, as a basis from which to start to reduce the emission of polluting gases and set up a target for the financial institutions. This is achieved by reducing the financing of polluting ships and favouring lending to only the so-called green ships with low pollution, aiming for a reduction in polluting ships.

In particular, the main Poseidon Principles are: 1) assessment of climate alignment; 2) accountability; 3) enforcement; and 4) transparency.

Please find below a specific analysis.

1) Assessment of climate alignment

Each year, the lenders will measure the level of decarbonisation that they have in their portfolios. This is achieved by measuring the operational emissions generated by the ships that they have financed the purchase or the operation of (ie leasing).

2) Accountability

In order to measure the level of decarbonisation of the ships subject to their financing, the lenders who are signatories of, or are adhering to the Poseidon Principles, use the data collection systems and methods that the IMO makes available to them. These systems are called IMO DCS (Data Collection System). Through the IMO DCS, the IMO secretariat or the lenders adhering to the Poseidon Principles will calculate the AER (Annual Efficiency Ratio) and according to which, they will verify the alignment with the decarbonisation principles.

3) Enforcement

In order to comply and follow the decarbonisation trajectory, it would be advisable to measure the pollution level of a ship that is financed by the financial institutions adhering to the Poseidon Principles. This measurement cannot be carried out without the cooperation of the ship owners. For these reasons, the Poseidon Principles require that specific clauses be included in the financing or leasing contracts, obliging shipowners to provide such data to the financial institutions or to the IMO secretariat.

4) Transparency

The lenders or the IMO Secretariat are able to calculate the level of alignment with the decarbonisation trajectory by the collection of data, and furthermore they will publish these results in November each year. The obligation to publish such data starts from the second year following the date of adhesion to the Poseidon Principles.

The extension to the insurance field

The Poseidon Principles for the marine insurance industry were published in November 2021. These principles refer to the brokers and insurance companies that offer hull and machinery coverage for ships.

The principles are very similar to those for the financial institutions (assessment, accountability, enforcement and transparency), but there have been some adjustments due to the peculiarities of the marine insurance field.

Any initial or subsequent signatory adhering to the Poseidon Principles shall first issue a press release after signing up and shall collect data in relation to the pollution (carbon intensity) of the ships it insures. Once this data has been collected, the broker or the insurance company shall calculate its own trajectory for reducing the greenhouse gas emissions of the ships in its portfolio. Indeed, it should have such calculations carried out by a recognised organisation (RO) of its own nationality where it has its headquarters (a so-called RO which, as described in the Poseidon Principles, typically, but not always, will be a classification society) or carry out the calculations itself. In any case, once the calculations have been made based on the formulas provided in the guidelines of the Poseidon Principles, it should send them to the IMO secretariat for publication.

The data collection tasks have also been adjusted to allow insurers to collect carbon intensity data from ship owners. While lenders can insert clauses in finance contracts obliging ship owners to submit data, the Poseidon Principles addressed to ship insurers suggest inserting such clauses in insurance contracts.

The output should always be the same. Insurers should aim to reduce greenhouse gas emissions from the ships they insure by 50 per cent by 2050. However, another important target has been added with respect to the Poseidon Principles for lenders: limiting the global warming to less than two degrees Celsius (preferably 1.5) compared to pre-industrial levels. This target does not exist in the Poseidon Principles for financial institutions.

The accessions

There are 11 founding lenders: ABN Amro, Amsterdam Trade Bank, Citibank, Credit Agricole CIB, Danish Ship Finance, Danske Bank, DNB, DVB, ING, Nordea and Société Générale. The following financial institutions have acceded: BNP Paribas, Bpifrance, CaixaBank, Citi, CIC, Credit Suisse, DBJ, Eksfin, Finvera, KfW IPEX-Bank, MUFG, Nordea, OCBC, SACE, SEB, SBI Shinsei Bank, Spare Bank 1, SR-Bank, Sparebanken Vest, Standard Chartered, SMBC, SMFL and SMTB.

Further to the lenders, there are the following signatories, affiliate members and supporting partners of the Poseidon Principles designed for the insurance field: Swiss Re Corporate Solutions, Gard, Hellenic Hull Management, Scor Global P&C, Victor Insurances, Norwegian Hull Club, Fidelis MGU, Navium, AXA XL, Skuld, WTW, Cefor, EF Marine Cambiaso Risso Group, Lockton, CTX Special Risks, Lochain Patrick Insurance Brokers, Gallagher, Cosco Shipping Captive Insurance and Iumi.

The Italian situation

Italian banks have not yet joined, but, as you may note, there was an important accession in the association: SACE (the Italian import-export trade finance agency). SACE's membership will certainly produce many effects for Italian shipowners. SACE is very active in shipping with the issue of guarantees in favour of financial institutions and, through its accession, has undertaken to adopt the strategy of reducing polluting ships financed in its portfolio. For this reason, even if the Italian institutions have not joined, the accession of SACE in many loans will guarantee the shipowners' commitment to order and purchase fewer polluting ships.

SACE's participation has indirectly caused consequences for Fincantieri given that the Ministry of the Economy, which indirectly holds control of both companies (SACE and Fincantieri), has authorised the issuance of the SACE guarantee, for a value of €876 million, in relation to loans to Fincantieri.

The first output

The 2020, 2021 and 2022 Poseidon Principles Annual Disclosure Reports for lenders and the 2022 Poseidon Principles Annual Disclosure Report for insurers have been published. Such reports show individual charts for each Poseidon Principles adherent and the relative level of adjustment to the so-called decarbonisation trajectory. The graphs relating to the financial institutions are interesting at the moment because it is possible to evaluate their work over a longer period than that of the insurers. Currently, only seven out of 28 lenders are in compliance with the decarbonisation trajectory. The other 21 are above the decarbonisation trajectory. Regarding the graphs relating to the insurers, the situation shows that none of the members are yet meeting the requirements, but we are only at the first survey.

Furthermore, this initial data will have to be taken with a pinch of salt considering the recent pandemic crisis which has not helped the shipping sector and has not favoured new investments.

Therefore, to assess whether or not the Poseidon Principles are achieving the target of reducing greenhouse gas emissions, it will still be necessary to wait at least another four or five years and monitor the Poseidon Principles Annual Disclosure Reports.

In any case, at the moment the feedback is certainly positive, given the large number of members.