Transporting around 90% of global trade, shipping is the engine room of the global economy.
Despite being the most efficient and eco-friendly way to move goods internationally, it still emits 3% of global greenhouse gases (GHG). With the accelerating pace of climate change bringing severe and widespread impacts across the world, the stakes are high. While the cost of decarbonisation is significant, it is a small price compared to the devastating toll of inaction and climate change. The importance of the shipping industry meeting the net-zero targets of the International Maritime Organisation (IMO) for 2030, 2040, and 2050 is clear.
At the start of 2024, the European Union (EU) extended its Emissions Trading System (ETS) to incorporate the maritime sector, spurring innovation in shipping and accelerating the EU’s decarbonisation efforts. However, regulatory uncertainty remains, and swift, large-scale retrofitting is needed. Alternative fuels such as methanol and ammonia demand substantial engine and fuel supply system upgrades, and only modern engine types allow for such changes.
Nevertheless, the speed of transformation in the industry is significantly influenced by the availability of financing for green shipping. The total investment needed to decarbonise international shipping has been estimated to reach around $1 trillion by 2050, with 87% of this required for land-based infrastructure and facilities to produce low-carbon fuels. Institutional investors have a massive opportunity to drive progress in the race to achieve net-zero targets. By closing the funding gap and driving the adoption of sustainable technologies, they can help accelerate the transition. Yet, investors need to navigate current headwinds.
Fuelling Innovation
Achieving the shipping industry’s green transition requires robust global regulatory measures and clear frameworks that create favourable investment conditions, driving long-term investment planning and innovations. International enforcements, together with local policies, propel meaningful industry-wide adoption of green shipping practices. The IMO’s recent outline for a maritime net-zero framework is an important step forward towards implementing mid-to long-term global regulations that effectively promote the energy transition of shipping and incentivise the world fleet. Its new goal-based marine fuel standard and greenhouse gas pricing mechanism will stimulate investments in clean technology, as well as contribute to a level playing field for early adopters.
Consistent and coordinated regulation also helps bridge the current price gap between green and conventional fuels. Low and net carbon-neutral maritime alternatives, like methanol and ammonia, are two to eight times more expensive than conventional fuels. Expanding supranational trading mechanisms such as the EU’s ETS, or creating new mechanisms to impose a global carbon fee for shipping, would increase green fuels’ competitiveness by incentivising owners and operators to transition away from high-emission fuels. Rebalancing the costs of next generation energy sources vis-à-vis legacy fuels would also provide reassurance to investors making allocation decisions, and to the broader market, including shipping customers, as to the long-term trend for both spot and charter rates. All of this feeds back into the long-term Return on Investment (ROI) projections which underpin the financial decisions which will spur the greening of the global fleet.
Currently, only 1% of the global bulk, container, and tanker fleet uses alternative fuels, but by 2030, 20% of all ships are projected to be capable of running on clean alternatives. Various promising green sources could help power the industry. However, with no clear frontrunner for the dominant clean fuel in the decades ahead, new-build ships must be flexible to accommodate different fuel types, while the existing fleet requires retrofitting. This adaptability allows investors to minimise risk, ensuring their assets are future-proofed.
Retrofitting for quick rewards
Investors don’t need to wait for the perfect confluence of commercial and regulatory conditions to contribute to the industry’s green transition. Retrofitting existing ships offers a clear opportunity for investors focused on quicker returns. By upgrading components like the bulbous bow and propellers, and installing pre-swirl devices for improved propulsive performances, ships can significantly improve their fuel efficiency and reduce emissions. Simple retrofits can reduce fuel costs by up to 27%, equivalent to 5,208 tons of carbon dioxide (CO2) per year, further increasing the market value of these ships and making them more attractive to potential buyers or charterers.
In the journey toward a net-zero future, investors have a crucial role in helping shipping transition away from carbon-emitting fossil fuels. By supporting retrofitting and efficiency gains in the short term, while championing global regulatory advancements and green fuel innovations in the long run, they can help close the green fuel price gap and drive the transition to a cleaner, more profitable shipping industry. The shipping industry is ready for transformation, but to reach its full potential, it needs investors who are committed to turning bold climate ambitions into tangible results.
