(Marine) asset values seem to bifurcate based on ESG compliance perceptions. Will "carbon obsolescence" play similarly to OPA 90 from two decades ago, when old assets turned out to be much more profitable despite their lack of "sex-appeal"?
For asset appraisal practitioners, the question of bringing up (marine) assets in compliance with new regulations was a known concern affecting values for a few years now. New regulations requiring new hardware (CapEx) or impacting daily operation costs (Opex) over an asset's economic life are a well-known business risk and asset value determinant.
Sometimes new regulations impose just an incremental cost, and in those cases, existing vessels can be retro-fitted and made compliant with the new regulations. Other times, new regulations require new vessel designs from the keel up. New ballast water management systems (BWMS) have been an example of the former case, while double-hull tanker mandates had been an example of the latter case in recent memory. For the first case, appraising ships when the differentiating factor was the BWMS, that was a quantifiable difference in price that could be accounted for in a vessel's valuation. However, how one would go about valuing a single-hull tanker during the phase-out period when both double-hull and single-hull tankers were allowed to trade all alike?
It seems that at present we live in a time that resembles the single-hull to double-hull transition period with (massive) new regulations slowly (and vaguely) coming into effect. ESG (Environment, Social, Governance) is the pre-occupation of every publicly-listed maritime company at the moment. Most companies have already produced one or two annual ESG reports by now, outlining their efforts to be better companies in that respect. There has been a growing list of ESG rating “agencies” that rank companies in shipping—and other industries, and assigning ESG scores. And there is an alphabet soup of acronyms, abbreviations and supervisory bodies in the US and overseas, for the shipping industry—and in general for ESG standards, but there is little consensus or uniformity of reporting (including auditing) and ranking. “ESG” appears to be ill-defined and up to interpretation.
No many issues on this planet are just “black” and “white”, so grey areas are to be expected even for the “green” field of ESG. However, when it comes to appraisal requests by lessors, banks and investors to place a value on a (marine ) asset at a time when ESG reporting requirements are not clear, the grey-ness of the matter becomes very critical.
At present, equipment, for all modes of transportation, running on fossil fuels alone seem to be poorly received by the market. Reportedly, fracking pumps and other fracking equipment running on diesel have dropped in value precipitously in the last 3-4 years, but dual fuel comparable equipment have actually appreciated in value. Similar trends have been observed in the international / blue water shipping industry as well. In other words, conventionally powered vessels have seen their values depressed while modern “eco-design” vessels are obtaining much stronger prices.
There is no doubt that new, modern-design assets are the future and deserve a “premium” pari passu comparable conventional assets; on the other hand, conventional assets are not automatically or immediately obsolete, and in quite a few cases, these conventional assets a decade or more of remaining economic life ahead of them. After all, it took twenty-five (25) whole years to formally phase out the single-hull tankers after the implementation of the Oil Pollution Act of 1990 (OPA 90).
It’s hard to tell whether presently stratospheric levels of marine diesel fuel prices have widened the asset price gap between “eco” and conventional marine assets, or that the ESG bandwagon has gained more traction recently, for whatever reasons. However, at present, the asset price gap—and especially the “perception” of such asset price gap—is exaggerated, and quite frankly, it seems to be driving the market to a great extent.
When it comes to putting a value and quantifying such asset price gap, the challenges are critical; as an appraisal, one has the obligation and responsibility to be fair and objective. And, quantifying the asset price gap for appraisal purposes is a tough call.
At a recent appraisal conference, a presenter used the term “carbon obsolescence” to grossly define the divide line between “eco” and conventional assets, but there have been few guidelines on how to quantify the price gap at the same conference. And, as hard as it is to quantify the carbon obsolescence (based on actual emissions that two different assets emit), when the whole energy supply chain is taken into consideration, the emission calculations are much more complicated. And, when broader actual ESG concerns (that is the whole of Environmental and Society and Governance) have to be addressed for valuing an asset and or company, the task of putting an accurate appraisal becomes immeasurably hard to meet.
After all, what exactly is “ESG” and how does it affect value?
Just two reminders before attempting to anwer the above questions:
a) Tesla was recently removed from the S&P 500 ESG Index (allegedly due to poor “G” issues as they lack an independent board of directors) while ExxonMobil ranks in the top ten of the same index.
b) Single-hull tankers were trading as recently as in 2015; although they were getting little respect for 25 long years and were sold at scrap prices in the secondary market, they have been one of the best investments ever in shipping; we can name at least two shipowners who became billionaires by loading up on cheap single-hull tankers and then laughed all their way to the bank for 25 years.
And, just to be clear, this article is not attempting to pass judgement or provide criticism; and, there is no doubt in our heart, that ESG is a noble purpose and the environment and society and governance deserve humanity’s full attention, at both a personal and a corporate level. However, as this is an article about (asset and business) appraisals and practice, as we have been intrigued by recent asset price gap and the pre-occupation with ESG (and/or so-called “greenwashing”). Some companies may unduly stand to lose money or make money (which is fine, as after all, such is capitalism), but there appears to be a craze that seems to drive values (and, policy).