Green investments in ocean industries
The intersection between green investments and ocean industries continue to attract increased attention from investors, financiers and companies in search of new business opportunities.
The global ocean industries are growing rapidly and the Organisation for Economic Co-operation and Development (OECD) estimates that the ocean economy's contribution to global value creation will double by 2030 (OECD (2016), The Ocean Economy in 2030, OECD Publishing, Paris). This trend is mainly driven by the important role of global ocean resources when addressing an increasing world population and demand for food, jobs, energy, raw materials and economic growth in the coming decades. It is imperative that the ocean industries reduce their environmental footprint and the stress on the oceans while still preserving profitability. Consequently there is a need for development of new and improved technologies and more efficient business models – both of which are well suited for green investments and green funding.
Green investments incorporate commitments to the promotion of environmentally friendly business practices and the conservation of natural resources in addition to the underlying economic interest. Different commercial and legal mechanisms are used to underpin these commitments in various types of investments.
Investment funds with a green mandate used to be part of a niche market, but environment, social and governance (ESG) factors are now very much part of investment decisions in the mainstream market. This is in turn resulting from a growing recognition that ESG factors also have links to value creation, e.g. because it attracts long term top-line growth for new products and markets as well as positive response from customers, employees, communities and governments. ESG now plays an important role both when potential investment cases are assessed and in form of requirements for continuous reporting and conditions for further funding.
Recognising that few of the many ESG reporting standards are suitable for shipping, the Norwegian Shipowners Association and The Governance Group has recently launched Guidelines for ESG reporting in the shipping and offshore industries.
However, although the importance of ESG has increased substantially the last few years, internal rate of return (IRR) still remains a key factor. Several of the regulatory driven green developments within the ocean industries are expected to be disruptive in nature, the IMO2020 regulation / scrubbers being the most recent example. In addition there are a number of technological initiatives and developments within the shipping sector, ranging from LNG fuel to electrical vessels. "New" ocean industries such as hydrogen, (floating) offshore wind, large scale offshore aquaculture and carbon capture are also developing rapidly. In these sectors first movers have been well rewarded and based on recent stock exchange rallies investors have proven their appetite for such projects.
Furthermore, asset play is a typical investment strategy in the maritime industries, with buyers placing orders for new-build vessels within segments where the supply is expected to be scarce. The market for wind turbine installation vessels (WTIVs) offers a recent example of this strategy being applied within new segments. With the expected expansion and improved profitability of offshore wind farms due to the massive increase in size of offshore wind turbines as a backdrop, orders placed in 2019 and 2020 alone will according to Clarksons Platou AS support a 43 % increase of the global fleet for WTIVs from 16 units to 23 units – and this is in addition to several owners recently announcing intentions to order further units. Service operation vessels (SOVs) for offshore wind farms are typically ordered on the back of longer term charters, but the growth curve for the global fleet of these units paints a similar picture - with 12 active units currently active, 8 under construction and 7 tenders yet to be awarded for additional units.
This combination of regulatory and technological developments and an appetite for asset play should be very well suited for short term investments with a potential for substantial returns and makes the ocean industries attractive from both an ESG and an IRR perspective.
The shipping sector is generally CAPEX heavy and projects typically need a high degree of external funding in addition to equity investments. Also within the financing sector there are new initiatives suited for a greener ocean industry.
Several shipping banks have taken a clear position as a driving force for the decarbonisation of shipping. With the introduction of the Poseidon Principles in 2019 the signatory banks introduced a framework for assessing and disclosing the climate alignment of ship finance portfolios. The principles only directly affect borrowers by information requirements, but could indirectly encourage banks to offer loans to customers who will have a positive effect on the sustainability of their portfolio. Where "green loans" / "green tranches" are offered, the effects for the borrowers will be much more tangible as available amounts must be used to specified green purposes (e.g. construction of LNG-fuelled vessels, installation of ballast water treatment systems on existing vessels, upgrade of cranes for wind installation vessels or similar) and agreed parameters and sustainability reporting could have a direct impact on the interest rate under the loan agreement.
Debt Capital Markets
"Green bonds" are becoming a popular way to raise finance for environmentally friendly projects, for example for development of renewable energy, environmental friendly transportation, waste management or similar.
Another instrument that may become increasingly important in the context of ocean industries are "blue bonds". These debt instruments follow a similar structure to its more established green cousin, but with the key difference that the proceeds are used to finance marine- and ocean based projects to safeguard the oceans. They gained attention in October 2018, after the World Bank facilitated a bond agreement to offload a small portion of the Republic of Seychelles’ debt in exchange for marine protection. Whilst these instruments largely have been used in sovereign bond issuances and similar, they may over time develop and have a role to play in the capital structure of corporations as well.
In July this year Norway and the other members of the High Level Panel for a Sustainable Ocean Economy issued a statement underlining that that World leaders must value the ocean in recovery from the COVID-19 crisis and that a sustainable ocean economy, effective protection, sustainable production and equitable prosperity go hand-in-hand. This is in line with the Norwegian Government's Ocean Strategy, which supports a multitude of governmental support programs. The support programs by ENOVA and other governmental institutions can provide crucial assistance to develop profitable projects. ENOVA especially focuses on early phase projects driven by new technology and innovation, their substantial contribution to Hywind Tampen being a recent example.
Structuring and development of new business models
At the corporate level, mergers, acquisitions and reorganisations are forged in the crossover between green investments and ocean industries in order to better position the organisation for future developments in this space. The merger and corporate reorganisation of Aker Solutions and Kvaerner, and in particular the spin-off of Aker Offshore Wind, is a recent prominent example.
We also see tendencies where companies at different levels in the value chain seek to control a larger part of the relevant project – customers in need of energy invest directly in the project, traditional suppliers are also taking the position as operator or make direct investments at project level and competitors form alliances in order to increase their scope. The recent development of alliance contracts (with their more advanced risk / reward profile) in the offshore oil and gas industry may also become a useful contracting tool for new green projects.