Recent extreme weather events should speed up discussions about shipping’s preparedness for a low-carbon future, writes Paul Stuart Smith, CEO of Zero Carbon Finance
Another week, another record weather event. More than 1,600 people were killed following recent torrential rainstorms in India, where last year’s exceptionally heavy monsoon had flooded large areas of Uttar Pradesh and Bihar states.
In addition, Hurricane Lorenzo was classed as the strongest storm ever recorded in the northeastern Atlantic in October 2019. It came only weeks after Hurricane Dorian laid waste to parts of the Bahamas. While, recently in the UK, heavy rainfall has also caused severe flooding in northern England.
These events are the latest demonstrations of how climate change is precipitating more extreme weather around the world. The physical threats to countries, coastal infrastructure, people, and business from extreme weather and rising sea levels are increasingly evident. That is why, in August 2019, Singapore’s Prime Minister Lee Hsien Loong warned that his country would need to spend USD72 billion or more on sea defences over the next century.
Shipping has been warned
These events should be a warning for the shipping industry. Depending on fossil fuels, both as cargo and for propulsion, the whole supply chain faces significant financial dangers as the world economy decarbonises and the International Maritime Organization (IMO) implements its greenhouse gas (GHG) strategy.
Yet, recent research reports, such as Carbon Carriers from Maritime Strategies International and A See Change from CDP (formerly Carbon Disclosure Project) suggest few shipping companies have begun to assess the serious challenges they face from the transition to a low-carbon economy. The IMO’s GHG strategy requires the shipping industry’s own emissions to be cut by at least 50% from 2008 levels by 2050. And achieving the goals of the Paris Agreement, to keep temperatures to less than 2°C above pre-industrial levels, means global energy-related emissions must peak by 2020 and then fall sharply.
According to the International Energy Agency, this would mean primary energy demand for coal and oil declining by at least 60% and 30%, respectively, by 2040. The Intergovernmental Panel on Climate Change (IPCC) states that keeping global warming within the much more desirable limit of 1.5°C would require oil production to fall as much as 87% by 2050. Coal use would need to drop by 97%, gas by 74%.
Such far-reaching shifts in the economy present huge risks, not just to shipping and fossil fuel companies, but to the entire financial system. Governments and central banks are increasingly concerned.
They are ratcheting up pressure on firms to factor climate-related risks into business strategy by using the major global reporting framework known as the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). Alignment with the TCFD recommendations by UK companies was one of the key measures announced in the UK government’s Green Finance Strategy in July 2019.
The aim is to get companies to disclose financial material information about climate-related risks in their mainstream reports, thus allowing investors to make better-informed capital allocation decisions, away from those companies whose assets could become stranded in a lower carbon world and towards those embracing new technology to reduce or eliminate emissions.
History is littered with collapsed companies that failed to adapt to a fast-moving world. Kodak, before the advent of the digital camera, is the most-often cited example. Banks, in the lead up to the financial crisis, failed to curb obviously risky mortgage-lending practices, while Thomas Cook, prior to its recent collapse, chose to ignore that most of its competitors had moved online.
For the shipping industry, implementing the TCFD recommendations would be an important first step for companies to take to ensure that they and their investors are not similarly sunk by the increasingly foreseeable and far-reaching risks from climate change.