• Simon Ring, at Pole Star


• 26.07.2022 10:15 am
#digitisation

Digitalisation has already increased the scale, scope and speed of world trade. Now, it looks set to extend to carbon emissions requirements in the shipping industry.

The pressure is mounting on exporters, importers, charterers and carriers to reduce their carbon outputs. It comes as governments around the world take action to cut greenhouse gas emissions, but the financial sector has been particularly proactive. For example, the UN-convened Net-Zero Banking Alliance has emerged as a major player since its inception in April 2021. Representing 40% of global banking assets, it is committed to aligning its lending and investments with net-zero emissions by 2050. As more and more banks come on board, the drive towards decarbonising loan portfolios and finance activity will accelerate even further.

The drive towards net-zero has already impacted the maritime sector. Currently responsible for around 950 million tonnes of carbon emissions annually, the shipping industry has been issued stern warnings by the UN, EU and the International Chamber of Shipping – the latter of which has even set out plans for a global carbon levy.

Incentivising carbon reductions

Wherever the shipping industry looks, there are clear movements being made to make it cut emissions, sometimes by punitive means, but also through incentives. In the trade finance sector, banks and lending platforms are likely to start offering preferential rates for greener vessels and routes when supporting transactions. Banks such as Rabobank, UBS, and Société Générale are already entering this market for green trade finance. As this sustainability-aligned set of incentives picks up business, more banks will come up with green trade finance products.

Sustainable digitisation

So, what role does digitisation play? Banking and trade finance organisations are becoming highly digitised, increasingly deploying AI and data analytics. They have steadily digitised their workflows during the pandemic, reducing headcount in many areas. The sector already uses digital solutions in most screening for Know Your Customer (KYC) and Anti-money laundering (AML) protocols mandated by international regulators. If they are to offer preferential rates or terms for green transactions, they are highly unlikely to take carriers at their word. They will want to see clear evidence – and they will prefer that evidence to be digital.

Backing green claims with data

Therefore, the main participants in a transaction will need to quickly and verifiably supply data that shows their emissions reduction credentials.

Each transaction involves its own complex ecosystem, and emissions expertise is often in short supply. Consequently, commodity companies, charterers, and carriers will struggle to meet the requirements for data swiftly and efficiently without their own integration of technology.

While banks have stepped up the pace of digitisation, global trade remains stuck with many paper-based processes. It’s no secret that these are prone to human error, delays, forgery and fraud. Banks will find the manual assessment of which ship is greener, and which route uses less carbon, a hugely time-consuming task.

Moving away from manual

For individual voyages, the most accurate method of assessing emissions is to measure fuel consumption and correlate that with the cargo the vessel is carrying. This is daunting for a commodity company as much as a bank, when it may need to charter hundreds of vessels at any time and needs detailed information on the green profile of each ship.

Banks and major exporters and importers are more likely to implement digital monitoring solutions that can be integrated into their existing KYC and AML systems.

Previously, it was difficult to agree on how to measure greenhouse emissions in a meaningful way for the maritime and finance industries. The Poseidon Principles, launched in June 2019, were an attempt to connect ship financing with environmentally friendly behaviour. Applicable to lenders, lessors, and financial guarantors including export credit agencies, the principles introduced a global baseline for climate goals.

The Sea Cargo Charter, established in 2020, offers an alternative. It grew out of the Poseidon Principles and uses a different set of metrics, enabling charterers to calculate how well-aligned bulk carrier shipping is to emissions reduction targets.

Real-time insights

What has changed is the availability of real-time information in detail, covering vessels, histories, and voyages. Charterers, operators, banks, finance houses, and liquidity platforms can all integrate this information into their current compliance systems. They can pull up relevant details in seconds, screening vessels for ownership sanctions compliance and carbon emissions in terms of propulsion system, fuel, and route.

Rather than relying on periodic or annual assessments, all relevant parties can see real-time information on whether a vessel is following the right route and speed with low-carbon or alternative fuel. Within the entire supply chain, when participants and counterparties invest in carbon reduction, they will want to see their efforts rewarded with preferential terms.

Transforming compliance

These reasons are key to the success of the integration of data from carbon assessment organisations. Thorough yet easily understandable, the data can be assimilated hourly for real-time insights. This also allows teams to effectively screen for carbon and the broader ESG (environmental social and governance) risks and opportunities.

Integration of data and screening automation naturally lends itself to global initiatives to advance digitisation across trade processes. By embracing paperless commerce, the trade finance ecosystem can ride the wave of digitisation without compromising on compliance.

The global networks of shipping and trade finance now have a golden opportunity to demonstrate their efforts to reduce emissions. Through real-time, fully integrated sustainability screening, they can provide convincing detail to financial institutions and regulators. This, in turn, promotes much greater transparency, trust and compliance. Ultimately, the digitisation of emissions screening will provide a compelling platform for showing tangible progress towards green goals.