Eco-efficient vessels more likely to be chartered, have higher asset values and longer lifespans under emerging two-tier market, according to the Carbon War Room (CWR).
The environmental advocacy non-profit says banks in the shipping industry are increasingly turning to energy-efficiency data when making investment and financing decisions.
"Banks are beginning to recommend efficiency retrofits to shipowners, and are using energy-efficiency data in deciding which vessels they finance — and which they won't. If this trend continues, efficiency retrofits will offer increasing wealth-creating opportunities and inefficient ships will become more and more unmarketable," expanded CWR chairman José María Figueres.
HSH Nordbank, KfW IPEX-Bank, and other banks surveyed by CWR indicated that vessel efficiency rankings — such as the A to G GHG Emissions Rating developed by independent ship vetting company RightShip and CWR — now form an important part of assessing risk and return, with inefficient vessels now representing a higher-risk investment.
Energy efficiency data is also being used in credit-approval processes for vessel purchases, loan assessments for retrofit projects, and re-sell or scrapping decisions, with banks citing efficiency as a key indicator for a vessel's profitability.
The recent incorporation of efficiency data into financing decisions heralds a significant market shift. Banks state they have seen the formation of a two-tier market comprising high- and low-efficiency vessels. Eco-efficient vessels demand a premium price at newbuild stage, are more likely to be chartered, maintain asset value over time, and have a longer lifespan.
Carsten Wiebers, who heads KfW IPEX-Bank's shipping business, commented: "As a consequence of the correlation of energy efficiency and loan risk, we have analysed our shipping portfolio based on the methodology of the Energy Efficiency Design Index (EEDI) and implemented design efficiency criteria in our credit approval process. In view of the beneficial risk profile and environmental benefits, we favour eco-ships over ships with poorer energy efficiency.
"We see a clear trend towards a two-tier market of high- and low-efficiency vessels—more energy efficient vessels have an enhanced marketability as well as a higher revenue potential for the ship owner and thus a more favourable risk profile for financiers."
KfW IPEX-Bank also revealed last year that efficient container vessels of comparable capacity consume 30% less bunker fuel than inefficient vessels at the same operating profile. This represents a significant cost advantage, particularly if competing vessels are switching to more-expensive distillate fuels in Emission Control Areas.
The existence of a two-tier market is becoming increasingly evident: 25% of the non-container charter market vet potential vessels for efficiency before charter and recent RightShip data analysis shows that the average lifespan of an "A" rated vessel is likely to be up to eight years longer than that of a "G" rated vessel. In addition, in 2014, three ports — Port Metro Vancouver, Port of Prince Rupert, and Port of Barbados — began to use the A to G GHG Emissions Rating to offer financial incentives to the owners of more-efficient vessels entering their ports.
Each vessel represents a multi-million-dollar investment and ship owners and operators rely on the banking sector to ensure they can build, buy, upgrade, and maintain these assets. This means that banks can exert a strong influence on the way the market moves and develops; each bank must carefully control its market exposure and efficiency is fast becoming a key measure.
This development comes at a time when private equity investors are showing greater interest in shipping. Some estimates put PE investment at between $7 and $12 billion. It is not unreasonable to assume that they too will examine environmental indices before making a decision, particularly as they are looking for shorter term gains.