2020 has been a surprise year, to say the least; whether for everyday life, for the world economies or for the shipping industry, any projections for the year have been completely overrun by the COVID-19 pandemic. Any other consideration in the shipping industry, such as tonnage supply and demand and IMO2020 implementation have taken a back seat.
COVID-19 has had tremendous impact on the broader maritime sector, with low demand, and accordingly lower freight rates, being the most predictable result. Other conspicuous impacts on the maritime sector has been a cruise line industry that has come to a standstill as cruiseships of all types and for all budgets have been moored as health regulators worldwide have come hard on them. And, hundreds of thousands of seafarers found themselves on no man’s land, literally, as shortsightedly many countries – even in countries with a strong maritime sector – are not allowing crew changes for ships in their waters leading to a human tragedy and exacerbate risks to the global supply chains.
2020 was supposed to be a year when ESG guidelines (Environment Social & Governance) were slowly and hesitantly to take a greater hold in the maritime industry. Implementation of IMO2020-lower-emissions mandated changes would have given a boost to cleaner fuels and more efficient engines. Also, in a favorable macro-economic environment, shipping companies were to be implementing social and governance changes and getting in line with regulatory changes, mostly widely mandated in the EU Zone.
However, instead of coping with its structural imbalances, the shipping industry (and the world) were caught fully consumed so far in 2020 (and rightly so) with reacting to the COVID-19 pandemic. At first sight, it would appear to be a great waste of resources (dealing with COVID-19) and potentially another excuse for ESG to be subordinated once again to a lower level of importance.
We dare suggest that COVID-19 may actually be a positive cause for change for the world and for the shipping industry as well. COVID-19, as a novel (unique and unprecedented) risk has been forcing humankind to question many beliefs and practices that were a “given” and a default position for other crises, either localized or financial crises, as COVID-19, has literally the potential to be an existential threat to humanity.
Let’s start with IMO2020 and the January 1, 2020 deadline and the rush in 2019 by many shipowners to install “open-loop scrubbers” and quickly comply with new emission requirements. Once COVID-19 appeared on the world stage, the expected spread in marine fuel pricing between ultra low suplhur fuel and conventional fuels collapsed from several hundred of dollars of fuel to as low as $40/ton, making the installation of scrubbers an exercise in futility and waste of hard earned equity (when assessed purely on financial terms). Shipowners who rushed to install scrubbers suddenly were found to have wasted millions of dollars per vessel ($ 15 billion for the industry by an estimate, at a time when the industry has chronically been bleeding losses from operations) and the low spread in the price differential has brought to the front pages that open-loop scrubbers it was a lame solution in the first place, as instead of dumping toxic chemicals into the air, open-loop-scrubbers-fitted vessels were dumping toxic chemicals into the sea; from an environmental perspective, a limited solution to a big problem, but a “solution” that was adopted in the name of expediency and without really asking the tough questions. With COVID-19 and a completely new set of assumptions, the gross inefficiency of the open-loop scrubber system has come into light. As demand for marine fuel has dropped (due to lower trading because of COVID-19), ships can now burn plentiful ultra low sulphur fuel (which is not prohibitively expensive); more importantly, as installation of new scrubbers has come to a screeching halt, refineries have come to appreciate that ultra low sulphur marine fuel is a viable product (whose market potential could have been cannibalized by heavy fuel oil burned at scrubber-fitted vessels), and likely, when trade and demand will increase eventually, ultra low suphur will be more competitively priced (at a low relative spread to heavy fuel) as refineries will keep producing it, and, ultimately, driving out of the market the open-loop scrubber system. Therefore, implicitly, COVID-19 has been a positive agent for change in the marine industry in this respect, and inadvertently it is and will be leading to higher ESG compliance!
Likewise, on a bigger scale, COVID-19 will act as an accelerator for ESG, even counter-intuitively, and despite the short term headwinds at implementing ESG policies. There is both logic and economics behind it. A pandemic risk was known and expected, as in general, every two years there is a virus strand that jumps from animals to humans and causes mini-pandemics (MERS, SARS, H1N1 are well-documented cases due to zoonotic viruses in recent memory that thankfully were regionally contained). Until now that all issues on preparedness had been mostly feel-good and theoretical, but as the risks and costs will be escalating (the COVID-19 global cost has been estimated to $2.6 trillion so far), the citizenry will start asking what their governments are doing to prepare for future risks; ditto for institutional investors who now are asking the corporate management on what steps their portfolio companies are taking to mitigate future risks, risks that deemed too hypothetic a short time ago. At the very least, COVID-19 has increased global awareness on issues that seemed too abstract until a year ago for the average person to apprehend (let’s start with global warming and rising seas) and awareness to the fact that the human population has grown so much as to collectively impact our planet and our own survival conditions, and to squeeze out other forms of life (humans move further into the jungles in an effort to sourcing more land for agriculture and development, which is one of the primary risks for ensuing pandemics in the future). The citizenry will be asking questions and demanding action from their leaders (“Black Lives Matter” and other social unrest in the U.S., in our humble opinion, is partially driven by anger and a preliminary quest for answers to COVID-19 by people used to be roaming the world and their country and all of a sudden found themselves locked down in their very own homes). And, investing and asset allocation to follow on ESG considerations, as in Q1 2020, sustainable investing funds grew by $46 billion globally, as per a Morningstar study, while the global fund universe experienced an outflow of appr. $385 billion. Sustainable investing is just about 22% of the assets of the US fund market (while almost 77% of the European fund market is dedicated to sustainable investing).
The COVID-19 pandemic may be a blessing in disguise as citizenry and investors start demanding action on issues broadly defined as ESG. And, the early steps taken for sustainable investing pre-COVID-19, in the new reality of COVID-19 are taking a new and, it would appear, more effective venue, as the experience of IMO2020 indicates. Leaders in the EU seem determined to not let the COVID-19 pandemic go to waste, and they have recoiled on ESG issues. And, as more money is poured into sustainable investing, changes are about to happen, including in the shipping industry. We note that although shipping finance has gotten tighter post-COVID for the shipping industry (like in many other industries), “green financing” has been a venue that has afforded a few shipowners to access competitively priced capital, and making nice headlines in an otherwise sea of disaster.
Expect ESG in shipping to get more important in the future. There are many good reasons to explain it, ethical and social, but the biggest catalyst is the wise dictum spoken in the dark days of a U.S Presidency: “Follow the money!” Profit (in a new macro-economic environment) now stands a better chance to drive the ESG agenda, rather than depending on the proverbial kindness of strangers.
Basil M Karatzas is an Accredited Senior Appraiser (ASA), Accredited in Business Valuation (ABV), a Certified Marine Surveyor (CMS) and Fellow with the Institute of Chartered Shipbrokers in the UK. Basil is the Founder and CEO of Karatzas Marine Advisors & Co.