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August 31, 2023

Voyager News, Voyager Blogs

Is ESG shipping’s most misunderstood acronym?

It has been described as a game changer that will reshape the business landscape, becoming a driving force behind investment decisions, with impact felt in ways that will touch not just financial institutions but also their interactions with clients and suppliers, their distribution models and human resources policies.

No, it’s not the carbon intensity indicator (CII), nor the energy efficiency existing ship index (EEXI) but environmental, social and governance (ESG) a means of, well, demonstrating that the business demonstrates good practice and a desire to show continuous improvement.

ESG has to date, had its most tangible impact in the banking sector as lenders have sought to move away from projects that produce carbon emissions, risk potential exploitation of labour and lack appropriate standards for corporate behaviour.

Shipping’s banks are moving rapidly towards increasing the proportion of their business that reflects the ESG agenda but since the majority of cargoes the industry moves are hydrocarbons in one form or another, a complete abandonment of energy shipping would be impractical to say the least.

These good intentions have not stopped criticism of ESG mounting as its critics derided it as anywhere between ‘woke’ and meaningless; a form of virtue signalling that provides companies with the ability to appear good as gold without the attendant regulatory baselines.

The trend toward using ESG as a benchmark and rating mechanism is not going away. Indeed, its use in shipping is about to get a shot in the arm.

Splash 24-7 reports that the UK’s University of Plymouth and the National and Kapodistrian University of Athens have developed an ESG reporting methodology framework and index, tailored to the specifics of the maritime sector, backed up by the input of an advisory committee of industry experts.

Formulated with the intention of closing the gaps in credible benchmarking within the maritime sector, the index initially covers more than 70 shipping companies. The aim is to provide a holistic reporting framework and indexing methodology that will allow shipping companies to demonstrate an accurate and measurable ESG profile with a standardised method of reporting.

Announcing the new index, Dr Stavros Karamperidis, head of the maritime transport research group at the University of Plymouth said the index is designed to support the industry through a transitional and challenging period, reducing the time and complexities required for companies to efficiently assess where they stand.

However, it could be that the creators of the index – not to mention its users – will have some way to go before being convinced by the numbers it produces.

A recent report in the Financial Times found that companies rated highly on ESG metrics create as much pollution as lower rated companies according to Scientific Beta, an index provider and consultancy.

Scientific Beta believes ESG ratings have little to no relation to carbon intensity, even when the environmental element is considered in isolation. It goes on to suggest that few analysts have looked in detail at the correlations which cause carbon intensity reductions to effectively be cancelled out.

The findings come amid strong demand for ESG investments, with ‘sustainable’ funds globally attracting net inflows of $49bn in the first half of this year, according to Morningstar, while the rest of the fund industry saw outflows of $9bn.

The researchers looked at 25 different ESG scores from three major ratings providers. They found that 92% of the reduction in carbon intensity that investors gain by solely weighting stocks for their carbon intensity is lost when ESG scores are added. Even just using environmental scores, rather than the full ESG rating leads to a substantial deterioration in green performance, they concluded.

Worse still, mixing social or governance ratings with environmental scores typically creates portfolios than are less green than the comparable index weighted by market capitalisation, with social and governance scores completely reversing the carbon reduction objective. Their explanation is simply that the correlation between ESG scores and a company’s carbon intensity is close to zero.

The inevitable conclusion is that a focus on ESG does not necessarily help an investor create a low-carbon portfolio, or achieve any other specific goal. Because ESG assessments are an aggregate product, their nature is to look at a range of material factors, so drawing a correlation to one single factor is always going to be difficult.

In the end, the implications for shipping may depend on how entities choose to deploy a rating or index score. As an means of demonstrating performance to employees in a private company, the lack of correlation may matter less. As an external tool for use with public shareholders, investors and customers, the use of ESG as an empirical measure of good intentions turned into action may have some distance to go.


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