Increased environmental legislations expose industry to financial risks

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Greater regulatory control over emissions may expose the shipping industry to significant financial liabilities, a report by Eurosif (European Sustainable Investment Forum) and environmental data company Trucost, has warned.

Examining six critical environmental, social, and governance (ESG) challenges facing the shipping industry, the report revealed that companies delaying or cancelling investments and initiatives in cleaner, more efficient vessels during the economic downturn could risk increased exposure to strict environmental regulations and the potential for substantially increased carbon costs.

With the European Commission’s aim to internalise environmental and health-related costs (negative externalities or damage costs) into transport pricing to help make the sector more sustainable, the report warned that companies could also be threatened financially and face potential losses if compensation payments had to be paid for associated pollution damages caused by their shipping operations.

Dr. Richard Mattison, Managing Director of Trucost said: “Trucost calculates that the combined external damage costs for air pollutants emitted from the shipping sector of the MSCI All World Developed Index amount to over € 7,714 million. If internalised, these damage costs would reduce the companies’ combined earnings before interest, tax and amortisation (EBITDA) by 69%.

“Given the announcement of plans to set new emissions caps by the International Maritime (IMO) and the European Commission, these environmental impacts present a significant risk to valuation for many shipping companies,” he added.

On the contrary, the report stressed that some companies who invest in environmental initiatives may benefit. Under cap-and-trade schemes which price carbon dioxide emissions, some carbon-efficient companies may stand to benefit as a result of a shift in freight away from carbon-intensive air transport, and that less polluting ships can be subject to far lower port charges.