The Poseidon Principles - What are they? How do they work? Will they work?
The Poseidon Principles, launched in New York on 18 June 2019, is an agreement reached between the finance sector and the shipping industry to integrate the IMO’s policies on climate change into ship finance decision making processes. They apply globally and, specifically, signatories to the Principles have to ensure that their ship finance portfolios are aligned with the targets set out in the IMO’s Initial Green House Gas (“GHG”) Strategy introduced in April 2018. It is hoped that making access to finances conditional upon compliance with the IMO’s GHG Strategy will encourage ‘greener’ ships in the industry.
The IMO GHG Strategy sets out the two targets below:
- To reduce CO2 emissions per transport work, as an average across international shipping, by at least 40% by 2030, pursuing efforts towards 70% by 2050, compared to 2008 (“IMO Intensity Target”); and
- To peak GHG emissions from international shipping as soon as possible and to reduce the total annual GHG emissions by at least 50% by 2050 compared to 2008, whilst pursuing efforts towards phasing them out (“IMO Absolute Target”).
- The IMO Intensity Target was set prior to the determination of the IMO Absolute Target. When the Absolute Target is converted into a relative (carbon intensity) target, it aligns better with the possible intensity trajectories of IMO’s Initial Strategy. The Intensity Target does not align as well and is expected to be updated at the next review of the IMO’s GHG Strategy in 2023 to bring it more in alignment with the Absolute Target. In the meantime, the Poseidon Principles are linked to the IMO Absolute Target.
- The Poseidon Principles are applicable to lenders, relevant lessors, and financial guarantors including export credit agencies. The Principles’ 11 founding signatories are American and European financial institutions, namely: ABN Amro, Amsterdam Trade Bank, Citi Bank, Credit Agricole CIB, Danish Ship Finance, Danske Bank, DNB, DVB, ING, Nordea and Société Générale.
Since the launch of the Principles, the following institutions have signed on bringing the total number of signatories to 18; BNP Paripas, bpifrance, CIC, Credit Suisse, Eksport Kreditt, Sparebanken Vest and SuMi Trust.
These 18 signatories jointly control a very considerable share of the finance market for the global shipping fleet.
- The Principles must be applied to all credit products provided where a ship(s) falls under the purview of the IMO, i.e. ships of 5,000 gross tonnage and above engaged in international trade.
The Four Principles:
- The Poseidon Principles comprise of the four individual principles below which together create a global framework for assessing and disclosing whether ship finance portfolios are aligned with the IMO’s stated targets above.
Principle 1: Assessment of climate alignment
- Signatories commit to annually assess climate alignment in line with the Poseidon Principles’ Technical Guidance for all Business Activities.
- Each ship finance portfolio must have its climate alignment calculated on an annual basis and this is done firstly by calculating the climate alignment of each ship within the portfolio. To determine a ship’s climate impact, her carbon intensity is calculated using the Average Efficiency Ratio (“AER”) metric. The AER is reported in unit grams of CO2 per tonne-mile and is calculated for all voyages performed by the ship over a calendar year. The AER is calculated from the information in the IMO Global Data Collection System (“IMO DCS”).
- Standard decarbonization trajectories are produced by the Secretariat of the Poseidon Principles for each ship type and size class, in a format that allows for simple weighting aggregation. The data for each ship is then measured against an appropriate trajectory. This method facilitates the understanding of climate alignment once the carbon intensity of the ships is understood, ensures that all calculations are made in the same way and that numbers are comparable between signatories.
Principle 2: Accountability
- The signatories expressly acknowledge the role of Classification Societies and other Recognized Organizations (“ROs”) in providing impartial and accurate information to the industry and commit to rely, in their calculations of the ships’ AER above, on the independently verified and certified data in:
- the Carbon Intensity and Climate Alignment calculations; and
- the Statements of Compliance issued under IMO DCS as information on the carbon performance of the related ships.
- The Classification Societies as ROs and as Members of the International Association of Classification Societies (“IACS”) are currently working to share their data with the signatories of the Poseidon Principles. London Offshore Consultants (“LOC”) have also created a digital platform, TRITΩN, to support the signatories and Owners by assessing the carbon performance of ships and the alignment of investment portfolios with the targets set out in the Principles.
Principle 3: Enforcement
Once the IMO DCS data is submitted to the IMO, the data is anonymised. Shipowners are not obliged to disclose data relating to their own ships to any third party, including their financiers.
To ensure compliance by the signatories with the Principles, the signatories are required to use ‘best efforts’ to include in each of their new finance agreements a standardized loan covenant clause, requiring shipowners to provide specific data to their financiers. The wording of such a clause is provided in the “Resources” section of the Poseidon Principles, and may be adapted as necessary. It is not intended that the clause imposes obligations on Owners which are more onerous than Owners’ other obligations in relation to the provision of periodic information to financiers under its facility agreements (for example to provide copies of Class and ISM documentation).
- This Principle, and the Accountability Principle above, are intended to ensure practicality, fairness and accuracy to build up trust in the Principles amongst the signatories.
Principle 4: Transparency
- This fourth Principle commits the signatories to publicly acknowledge, no later than 30 November of each year, the fact that they are members of the Poseidon Principles.
- The signatories are also under a requirement to report the overall climate alignment of their shipping portfolio and supporting information on an annual basis, by 30 November of the calendar year after becoming a signatory.
- The climate alignment score information will be shared with the other signatories by 31 December of each year, but the same will not be made publicly available.
- In summary, the Poseidon Principles may be described as a framework for assessing and disclosing the climate alignment of ship finance portfolios that is consistent with the policies and ambitions of the IMO to reduce greenhouse gas emissions for shipping.
- The IMO’s decision on its future GHG strategy is being closely monitored by the EU Commission (“EU”). Should the EU not be satisfied that any new targets adopted at the IMO’s Revised Strategy in 2023 would deliver meaningful greenhouse gas reductions from ships, and are in full alignment to achieve the Paris Agreement’s goal of stabilising any increase in average world temperature at well below 20C (and aiming at 1.50C) above pre-industrial level, it may decide to include shipping in the EU Emissions Trading System (“ETS”). The IMO has thus far been pushing back on such a suggestion.
- The shipping industry, along with many other industries, has been severely impacted by the Covid-19 pandemic. In the anticipated global recession that now follows, it may be that the 2023 IMO targets will not be as ambitious as they could otherwise be. As with all IMO initiatives, however, implementation is left to the different jurisdictions. It is, therefore, possible that if the targets are not considered sufficiently ambitious, some States could introduce more stringent implementation and sanctions, perhaps even including the criminalisation of companies falling foul of GHG legislation.
- Has Covid-19 thrown a spanner into the works for the Poseidon Principles which were just gearing up for take-off immediately prior to the pandemic? Many in the industry, including shipowners’ customers, are cautioning against any weakening of the IMO’s targets. Indeed, there is a push for a greener post-pandemic recovery which means Owners investing in more energy-efficient ships. The pandemic has also brought to the fore issues with crew changes and crew repatriations. In a future where epidemics will become ever more frequent, investment in more automation seems unavoidable.
So, perhaps the Poseidon Principles will yet prove to be instrumental in helping the industry reach this greener world that we are all striving for.
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