Introduction
Shipping is the backbone of international trade, responsible for transporting around 90% of global goods and yet despite being the largest carbon emitter in the transport industry, shipping remains the most emission-efficient mode of transporting goods per ton-mile. Historically, this relative efficiency allowed the maritime industry to avoid the stringent carbon mitigation obligations faced by other sectors, with successive EU legislation exempting shipping from many decarbonization mandates.
However, as the global focus on decarbonization intensifies, the maritime sector is now under unprecedented pressure to improve its carbon footprint. As a result, both legislative and private sector initiatives are beginning to reshape the operational landscape for ship owners and financiers, pushing stakeholders to transit to a more sustainable future.
Regulations
Voluntary frameworks like the Poseidon Principles have been adopted by most major ship finance banks, offering favourable loan terms to ship owners fulfilling sustainability targets (or stricter terms on poor performers). The Poseidon Principles provide a framework for integrating climate considerations into lending decisions, encouraging greater accountability in the sector. Other voluntary measures include the Sea Cargo Charter, a global framework designed to provide a standardized approach for assessing and disclosing the climate alignment of shipping activities by chartered vessels, helping charterers make more informed decisions about their environmental impact.
Complementing these non-mandatory initiatives are legislative measures stemming from the European Green Deal and Fit-For-55 Package, building on the Paris Agreement’s targets. Notable regulations include:
EU Taxonomy Regulation: Establishes a common framework for classifying sustainable activities, aiming to prevent greenwashing by providing clear criteria for what constitutes a sustainable economic activity.
EU Emission Trading System (ETS): Extends to maritime activities from 2024, requiring ships to account for their emissions and purchase allowances for their CO₂ output. This cap-and-trade system incentivizes emission reductions by putting a price on carbon.
Carbon Intensity Indicator (CII) and Energy Efficiency Existing Ship Index (EEXI): Monitor the energy consumption and carbon efficiency of vessels in relation to their cargo capacity and distance travelled. The CII measures a ship’s operational efficiency, while the EEXI focuses on the technical efficiency of the ship’s design.
These legislative instruments emphasize the importance of transparent monitoring, reporting, and verification of carbon mitigation strategies. Ensuring credible and independently verified reporting is crucial for stakeholders to navigate the operational risks of new legal obligations as well as enabling them to develop sustainability plans and trajectories through scientifically backed data. Such a transparent approach will also assist in protecting stakeholders against potential greenwashing accusations through the provision of a clear, verified account of environmental performance.
Greenwashing
Greenwashing is a well-known issue, but its practical manifestations can be somewhat ambiguous. Definitions vary widely, with the EU Taxonomy Regulation referring to it as “the practice of gaining an unfair competitive advantage by marketing a financial product as environmentally friendly, when in fact basic environmental standards have not been met,” while broader definitions emerging from case law include “making false or exaggerated claims about a company’s environmental performance” or “making claims that obscure the extent of the environmental harm which it may be causing.”
The risk of greenwashing is a growing concern for borrowers and financiers and several recent high-profile cases highlight the legal and reputational risks associated with greenwashing:
- Dieselgate (Volkswagen Group): This case revealed that Volkswagen had installed software in diesel vehicles to cheat emissions tests, falsely marketing them as low-emission vehicles. The scandal resulted in significant fines and damage to the company’s reputation.
- BP’s “Keep Advancing” Campaign: In 2021, BP faced scrutiny over its advertising campaign that emphasized its investments in renewable energy while downplaying its continued investment in fossil fuels. The UK Advertising Standards Authority (ASA) ruled that BP’s ads were misleading.
- Deutsche Bank and DWS Group: In 2022, German prosecutors raided the offices of Deutsche Bank and its asset management arm DWS over allegations of greenwashing, where DWS was accused of overstating the environmental credentials of its investment products.
- KLM’s “Fly Responsibly” Campaign: In 2022, KLM was accused of greenwashing for suggesting that flying with the airline was a responsible choice due to its investment in biofuels and carbon offset programs. Critics argued that the campaign misled consumers about the actual environmental impact of flying.
- Eurowings’ “Save 20% CO₂” Claim: In 2021, Eurowings faced criticism for claiming that passengers could save 20% CO₂ by choosing certain flights. Investigations revealed that these claims were not sufficiently substantiated, leading to accusations of greenwashing.
- HSBC’s Climate Claims: In 2022, HSBC was found to have made misleading statements with advertisements highlighting the bank’s green initiatives while omitting information about its continued financing of fossil fuel projects. The UK ASA banned the misleading advertisements, citing a failure to represent the bank’s overall impact accurately.
While the above cases are not shipping related, the maritime industry can nevertheless learn from these examples. Collecting credible, accurate, and verifiable data is essential to avoiding greenwashing claims and ensuring transparency and accuracy in environmental reporting will help mitigate the risk of greenwashing accusations.
One key strategy is to adhere to international standards and frameworks for sustainability reporting, such as the Global Reporting Initiative (GRI) and the Task Force on Climate-related Financial Disclosures (TCFD). These frameworks provide guidelines for reporting environmental performance and can enhance the credibility of green claims.
Conclusion
The shipping industry is embarking on the green transition at a time when case law in other sectors provides valuable lessons. This timing theoretically equips the maritime sector to better navigate decarbonization obligations while avoiding greenwashing claims. To achieve this, ship owners and financiers must assess the climate risks of their vessel fleets and loan portfolios, implementing effective control and monitoring of emissions and decarbonization targets in a transparent, accurate, and verifiable manner.
By prioritizing credible data and rigorous verification processes, the maritime industry can confidently advance towards sustainability, ensuring that green claims are not only ambitious but also substantiated. This will protect stakeholders and support the broader goal of reducing the industry’s environmental impact. Moreover, embracing innovative technologies such as wind-assisted propulsion, alternative fuels (e.g. hydrogen and ammonia), and energy-efficient ship designs will further bolster the sector’s decarbonization efforts.
Robust regulatory frameworks and voluntary initiatives are laying the foundations for a more sustainable shipping industry. It is, however, crucial for stakeholders to remain vigilant against greenwashing to maintain credibility and achieve real environmental progress. By learning from other industries and adhering to stringent reporting standards, the shipping sector can more effectively navigate the complexities of decarbonization and move towards sustainable practices with reduced risks.
Disclaimer│ The information provided on this Update does not, and is not intended to, constitute legal advice. All information, content, and materials available are for general informational purposes only. This Update may not constitute the most up-to-date legal or other information and you are advised to seek updated advice.
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