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ESG: why ‘standing still is not a strategy’

31 Mar 2021by Rebecca Moore, Riviera 

Shipowners must meet the demands of increasing ESG regulations and ensure ships are recycled responsibly – but there are also opportunities to be had within ESG

Riviera Maritime Media’s ESG ratings: the new focus of shipping boardrooms webinar, sponsored by MARITEC (member of CTI Group), was held on 30 March 2021 during Riviera’s Environmental, Social and Governance (ESG) webinar week.

MARITEC senior vice president global client relations Captain Herbert Soanes explained ESG ratings, “It answers the key questions of how exposed your company is and how it is responding to the key risks and opportunities related to ESG in comparison to your peers in the industry.” He added that while social responsibility was about crew welfare, it also “extends far beyond that to everybody along the value chain”.

A major part of ESG and a large topic of the webinar was why shipowners must ensure that responsible ship recycling takes place.

Capt Soanes said “Some of you must be wondering ‘Do I really have liability when the ship is being recycled – I don’t even own the ship, I am selling it to a cash buyer. Is it my responsibility?’ Yes it is, and you had better believe it.”

He cited the example that last year, the UK High Court refused to strike down a claim of negligence brought about by the death of a worker at the recycling of a UK-owned ship in Bangladesh. This is despite the shipowner in defence claiming no liability, for reasons including they were following standard industry practice, the ship was sold ‘as is’ to a cash buyer and they had no control over working conditions at the yard.

As a result, a major UK law firm concluded there is a very real result of legal liability, as well as damage to corporate reputation, and that precautions against liability need to be taken.

Responsible ship recycling

Explaining what form this protection should take, Capt Soanes said it was about having responsible recycling supervision from a team on the ground. They “safeguard company reputation, make sure corporate social responsibility criteria is met, mitigate risk against potential losses and give you peace of mind at a nominal investment,” he said.

He added there are a whole host of things MARITEC can do, even before the ship reaches the yard. Mr Soanes said “The key objectives are health and safety of yard workers, protection of the environment, making sure hazardous materials are properly and correctly handled and all regulations are met.”

The China Navigation Company general manager, sustainable development, Simon Bennett also highlighted what companies should and could be doing in respect to ESG if they have ships to be recycled. Speaking about what China Navigation Company does to responsibly recycle ships – it has recycled 16 older ships as it has re-tonnaged its fleet in the past five years – he explained that the company uses a class society to pre-audit the yards, as well as audit the recycling. Three of its seafarers are present at the yard the whole period the gates are open. “We do that because we believe we should do that. We don’t have any legal ownership of the ship, it is no longer owned by ourselves, it has been sold to a cash buyer and then sold to the yard, but it is effectively extended-producer-responsibility,” Mr Bennett said.

He said that signing a sale and purchase document then “rubbing hands and walking away from it – is not acceptable in today’s day and age. We have a responsibility to the workers in the shipyard and the environment which comes back to the way the ship is recycled.”

The company is a founding member of the Ship Recycling Transparency Initiative (SRTI), which believes transparency will drive progress in the responsible ship recycling area.

“We believe transparency across the shipping value chain will help to raise practices… we post our policies on the website in word format and are very happy if another company comes along, downloads it, rebadges it and takes it away. We are seeking to raise the bar across the industry,” said Mr Bennett.

SRTI has a steering group and has 30-40% of the world’s container fleet represented on it as well as well as financial stakeholders and class societies.

The importance of responsible ship recycling was shown by responses to a poll of the webinar’s delegates. Asked: have you had internal discussions on the supervision of the recycling of your ships, the majority (66%) said yes, while 34% said no.

And asked, had you realised your potential corporate liability (legal and reputational) related to the recycling of your ships? 74% said yes, with just 26% saying no.

ESG regulation increase

Meanwhile, looking at ESG as a whole, The Governance Group partner Joachim Nahem highlighted how regulations related to ESG has increased, and in the next two-three years there would be a lot more ESG regulation at both a national and regional level.

The EU has been the frontrunner in this. Mr Nahem added that shipowners should pay attention to national regulations, including accounting acts. “We are seeing that financial regulators are demanding more ESG information.”

Homing in on ESG ratings, he said “There is clearly a very strong movement on ESG ratings, and the coverage is also increasing, so over time, any publicly listed traded company will have an ESG rating”.

He added “We are seeing a lot more ESG focus from capital markets.” However, when it comes to capital markets, it is not just about risks and downsides, but, Mr Nahem said, there is also a lot of upside and opportunity to be had.

He said “That is one of the key messages when it comes to ESG. If you do this well, there is a lot of opportunity. One of these is issuing debt. We have seen a tremendous rise, from a low base, of issuing green bonds, new debt instruments are coming also, including sustainability-linked bonds. In the shipping industry there have been examples recently of several companies issuing debt based on corporate targets on sustainability. All that have been issued have been oversubscribed. There is more money than there are green debt instruments out there and it is not just for shipping but all industries… that is one to watch in terms of opportunities.”

Mr Nahem said when The Governance Group advises senior management and boardrooms on ESG, the three most important things from a short-term perspective are: an ESG scorecard to follow short-term and long-term targets on material topics for the company; tightening or strengthening governance management systems; and improving reporting. On this last factor, Mr Nahem said while there are different ways to do this, the TCFD climate risk framework used for financial disclosures is “really key for everyone”.

Shipowners Claims Bureau chief executive Joe Hughes reflected on the themes raised in the webinar from a P&I perspective. “P&I clubs are effectively creatures of the shipping industry so those initiatives taking part in the maritime community that we serve necessarily have a knock-on effect in the manner in which the clubs themselves see the world, and ESG and sustainability is a very important part of it.”

Mr Hughes added “Because we deal with liabilities as clubs, we are looking at the more holistic risk that the shipowner brings to the club… in a manner that makes the principle of ESG more important than it might be in the perspective of other marine insurers,” Mr Hughes said.

Looking to the future, he said “Clubs have further steps to take in establishing and embedding the principles of ESG even more firmly in the manner in which they see the world and go about their business. I have every expectation this as a trend will continue.”

Key conclusions

In conclusion, panellists highlighted their key takeaways from the webinar. Capt Soanes said “…ESG is now far more than just the activism people may have seen it as before, it is about capitalism and that social responsibility, which probably meant just your employees and their communities, is now a lot broader. We are also seeing the court system take a much broader legal interpretation of the obligations of corporations.”

Mr Bennett said there were three areas he wanted to highlight “Extended producer responsibility is coming our way, we cannot sign sale and purchase agreements, drop our hands and walk away anymore, so a prudent shipowner needs to plan for that now and to act for it. Transparency will drive change… and the SRTI is working hard to achieve that in the ship recycling area. In terms of doing the right thing, it should be done because it is right thing to do ethically and because you have to in a regulatory environment and increasingly our environment is being regulated.”

He summed up “If you want to continue as a business, clients and shippers are demanding it so you have to do it anyway – so don’t waste energy fighting it.”

While Mr Nahem warned “Standing still is not a strategy on ESG, it is moving fast and some of it is noise but there is real substance, and this is not a fad so if you stand still you risk losing in terms of reputation and cost of capital and maybe even regulatory punishment.”

Mr Hughes summed up “The real challenge is going to be about achieving consistency both in relation to the individual sector and regionally too. ESG and sustainability are most assuredly here to stay, and we all have got to raise our game to deal with it.”

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