Environmental, Social, and Governance (ESG) has gained traction in recent years as a result of its potential to aid companies in performing well while also having a net-positive contribution to society. It represents a corporate model and concept shift away from short-term profit maximization, towards a more sustainable business model that considers the environment, the supply chain, employees and the broader society.
ESG is gradually spreading in the shipping industry. It is comprised of a set of non-financial factors utilized to assess the performance of sustainability of companies, organizations, or investments.
Under “E” the aim of a shipping company is to respond effectively to climate change and GHG emissions, efficiently utilizing resources and waste management, preserving biodiversity and ecosystem services, complying with the environmental regulatory framework. These are vital issues for companies in mitigating risks and in enhancing their long-term financial performance.
The sector’s decarbonization is prevailing in the global and EU regulatory agenda. The revised IMO GHG Strategy aiming to net-zero GHG emissions from international shipping close to 2050, the short term technical and operational measures (EEXI and CII) to improve energy efficiency and reduce GHG emissions coupled with the need to comply with the EU carbon pricing schemes – ETS and FuelEU Maritime – by 2024 and 2025 respectively, urge the shipping companies to take their environmental performance seriously.
The fact that investors are evaluating shipping companies based on ESG criteria is a clear sign that the “wait-and-see” approach is not as popular as it used to be.
When it comes to industry’s initiatives, ESG is a key factor in the Poseidon Principles and an evolving landscape in greener ship financing. Shipping companies’ path to a sustainable future also requires a close eye to the developments in artificial intelligence, utilizing effectively the relevant maritime technology in conjunction with investments in alternative fuels and infrastructure.
EU is a pioneering force in the ESG regulatory sphere. The EU’s Sustainable Finance Framework is a comprehensive effort to direct capital towards sustainable activities. The EU Taxonomy will provide a clear understanding of which activities can be considered environmentally sustainable, thereby facilitating sustainable investment. Other key regulatory measures include the Sustainable Finance Disclosure Regulation (SFDR), the Non-Financial Reporting Directive (NFRD) and the EU Green Bond Standard.
Under “S” the objective is to appraise a company’s relationships with its employees, customers, suppliers and local communities. By addressing labor practices, health and safety, human rights, diversity, equity, and inclusion, community engagement, and responsible supply chain management, companies can enhance their long-term competitiveness and create value for all stakeholders.
The “S” pillar is to a great extent overshadowed by the pressing matter of climate change. The COVID-19 pandemic highlighted its importance with all social issues becoming more noticeable, pushing companies to examine how they treat their most important asset: the human element! The integration of all these issues into corporate strategy and decision-making is vital and should apply in conjunction with the persisting priority to comply with the minimum standards for seafarers’ working and living conditions and the standards on safe management and operation of ships, stipulated in ILO-MLC and IMO-ISM Code respectively.
Under “G” the aim is to focus on internal processes, structures, and policies that direct a company’s decision-making and supervision. By concentrating on board composition and structure, leadership compensation, shareholder rights, ethics and regulatory compliance, companies can reduce potential risks, guarantee responsible management and preserve investors trust and confidence.
Investors and stakeholders are seeking greater transparency and accountability from companies. This has led to the development of a range of standards and guidelines, such as the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB), which provide a framework for measuring and reporting on a company’s governance practices as part of its overall ESG performance.
Anti-Corruption and sanctions are at the core of proper governance. Due to the global nature of the industry and the changing geopolitical landscape important challenges are being imposed which maritime stakeholders should navigate with caution. Τhe imposition of sanctions together with laws such as the Foreign Corrupt Practices Act (FCPA) highlight the importance of proper due diligence. In addition, the work of the Maritime Anti-Corruption Network (MACN) is an important step to fight corruption in continents that are more prominent.
It is equally important to approach the whole ESG concept and more specifically the green financing from the funder’s perspective. The financial institution providing a loan may well have obtained its funding linked to environmental performance and in any event a threat to the earning capacity of a vessel is also a threat to the value of the funder’s security.
The effective integration of ESG principles requires a collaborative effort among all stakeholders. Governments and regulatory authorities should not only monitor the implementation of the regulatory framework but they should also provide clear guidance and support to all the relevant stakeholders in addressing effectively the ESG principles.
Addressing and managing ESG issues and risks are preconditions for sustaining long-term value of the shipping industry. ESG is not a trend that will go away. It should rather be seen as an essential strategic company concern!