Climate Change and Our Business

UNFCCC Paris Agreement and IMO Emission Reduction Strategy

The UNFCCC Paris Climate Agreement and the UN Sustainable Development Goals urge governments and private sector companies to work together and take urgent action to combat climate change and its negative impact on the world, the people and the environment. Shipping is one of the fastest growing sources of transport greenhouse gas emissions. Maritime transport emits around 850 million tonnes of CO₂ annually and is responsible for about 2.3-2.7% of global Greenhouse Gas (GHG) emissions (Source: International Maritime Organisation (IMO) report to the IPCC 3^rd Greenhouse Gas study).

Shipping emissions are predicted to increase between 50% and 250% by 2050 – depending on future economic and energy developments – if no action is taken. This is not compatible with the internationally-agreed goal of keeping the global temperature increase to well below 2°C, and to aim to limit it to 1.5°C, compared to pre-industrial levels, and which requires worldwide emissions to be at least halved from 1990 levels by 2050. It is believed that under a business-as-usual scenario and if other sectors of the economy reduce emissions to keep global temperature increase below 2°C, the maritime sector could represent a very significant 10% of global GHG emissions by 2050.

After over a decade of study and discussions, in April 2018, IMO at Marine Environment Protection Committee (MEPC) 72 finally adopted an initial emission reduction strategy in line with the UNFCC Paris Agreement of December 2015 (noting that the aviation and maritime sectors are excluded from Kyoto and Paris Agreements due to the transboundary nature of their operations). This requires that the shipping industry must reduce its total annual GHG emissions, with the following level of ambition set by the IMO:

1. Carbon intensity of the ship to decline through implementation of further phases of the Energy Efficiency Design Index (EEDI) for new ships to review with the aim to strengthen the energy efficiency design requirements for ships with the percentage improvement for each phase to be determined for each ship type, as appropriate;


2. Carbon intensity of international shipping to decline to reduce CO₂ emissions per transport work, as an average across international shipping, by at least 40% by 2030, pursuing efforts towards 70% by 2050, compared to 2008; and


3. GHG emissions from international shipping to peak and decline to peak GHG emissions from international shipping as soon as possible and to reduce the total annual GHG emissions by at least 50% by 2050 compared to 2008 whilst pursuing efforts towards phasing them out as called for in the Vision as a point on a pathway of CO₂ emissions reduction consistent with the Paris Agreement temperature goals.

It is believed that 40% of the total reduction required can be achieved through enhanced design and operations. The balance will have to be achieved by switching to alternate fuel or offset under a Market Based Measure (MBM) such as an Emissions Trading Scheme (ETS).

Implementation of Sulphur 2020 Limit

The new lower 0.5% limit on sulphur in ships’ fuel oil will be in force from 1^st January 2020, under IMO’s MARPOL treaty, with benefits for the environment and human health. The new limit will be applicable globally - while in designated emission control areas (ECAs) the limit will remain even lower, at 0.1%.

Enforcement, compliance with and monitoring of the new sulphur limit is the remit and responsibility of States Party to MARPOL Annex VI. Many ships are expected to utilise new blends of fuel oil which will be produced to meet the 0.5% limit on sulphur in fuel oil, however there are currently three options available for ship owners to meet the IMO 2020 regulation:

• Installation of the exhaust gas cleaning systems (EGCS) to “scrub” out the sulphur from the high-sulphur fuel oil;
• Use of compliant low sulphur fuel oil; or
• Using lower carbon footprint alternative fuels such as Liquefied Natural Gas (LNG).

CNCo plans to meet this regulation by using a combination of the first two options. We will install open loop EGCS on our eight container vessels currently under construction. These open loop EGCS are hybrid type scrubbers which means that they can be upgraded to a hybrid (open or closed loop) EGCS system should there be a need in the future. The rest of CNCo’s fleet will use compliant Low Sulphur Fuel Oil (LSFO).

Marine Plastic Litter

The MEPC will consider a number of proposals to address the issue of marine plastic litter in the context of 2030 Sustainable Development Goal 14 (“SDG 14”) on Life in the Oceans. A number of proposals have been put forward for consideration, covering issues such as a proposed study on the state of marine plastic litter; looking into the availability and adequacy of port reception facilities; looking at marking and retrieval of fishing gear; reporting the loss of fishing gear and containers; facilitating the delivery of retrieved fishing gear or passively-fished waste to shore facilities; reviewing training; raising awareness; and strengthening international cooperation.

CNCo thus started looking at the reduction of Single Use Plastic Bottles (SUPBs) on board our vessels. We installed drinking water purification Reverse Osmosis (RO) systems on nine bulk carriers in 2018 which led to reduction in SUPBs by 3,600 per month which is an almost 70% reduction from the baseline. We will continue rolling out installation of the ROs on the rest of our owned and managed vessels in 2019 and educating our shore and seagoing employees on the dangers of the effect of SUP on the environment.

Climate Change and Our Business

Climate change and GHG emissions in the shipping industry simply must be addressed as the sector delivers ~90% of global trade in the most efficient way, and is a key driver of the world’s economic engine.

CNCo is fully aware of, and understands the concerns of global governments and the public about climate change risks. We recognise that the use of fossil fuels to meet the world’s energy needs contributes to the rising concentration of greenhouse gases in the atmosphere, which will result in further increases in global temperatures. We recognise the dangers of inaction and we are committed to reducing CNCo’s environmental impact.

There is a growing demand for climate-related information by investors, lenders, insurers and other stakeholders. The Task Force on Climate-related Financial Disclosures (TCFD)* (*Source: https://www.fsb-tcfd.org) provides voluntary, consistent climate-related financial risk disclosures for use by companies in information to investors, insurers and other stakeholders.

While the recommendations of the TCFD primarily relate to listed entities and as we transit into a lower-carbon economy, we have, as good business practice, assessed climate-related risks and opportunities for CNCo. We are in dialogue with the Swire group of companies to determine which climate change scenarios are the most relevant to each operational company to adopt for TCFD reporting purposes.

Many banks that lend to shipping lines announced that climate impact will be integrated into the criteria that determines how much they will lend to shipping companies and at what rate, an effort the banks say will substantially cut CO₂ emissions in the industry. This helps to prioritise climate change issues in the business’s decision-making processes and will help drive transitioning to the necessary technology for the design of ships, reduction of emissions and, crucially, radical decarbonisation that the industry requires.

The lending framework, called the “Poseidon Principles”, will assess and disclose whether financial institutions’ lending portfolios are in line with the IMO’s climate goals adopted in 2018. The Poseidon Principles are the world’s first global, sector-specific and self-governing climate alignment agreement among financial institutions which is very important in driving climate change action within the shipping industry.

There are a number of climate change related considerations of which our business is aware and for which we have plans to consider and address:

Evolving Policy environment:
policy actions around climate change continue to evolve. Some examples include implementing internal carbon-pricing mechanisms to reduce Greenhouse Gas emissions, shifting energy usage toward lower emission sources and adopting energy-efficiency solutions. The risk and financial impact of policy changes depend on their nature and timing.

Physical risks:
risks resulting from climate change can be event driven or due to longer-term shifts in climate patterns. Physical risks may have financial implications for organisations, such as direct damage to assets and indirect impacts from supply chain disruption. Organisations' financial performance may also be affected temperature changes affecting organisations' premises, operations, supply chain, transport needs, and employee safety.

Transition risks:
transitioning to a lower-carbon economy may entail extensive policy, legal, technology, and market changes to address mitigation and adaptation requirements related to climate change. Depending on the nature, speed, and focus of these changes, transition risks may pose varying levels of financial and reputational risk to organisations. Supply and demand can shift as climate-related risks and opportunities are increasingly considered.

Future-proofing:
navigating decarbonisation also suggests that because of the nature of shipping markets and the ability of owners to modify vessels to keep them competitive in carbon-constrained markets, catastrophic asset stranding of entire fleets will probably not occur solely due to climate policies. Vessels must be designed for flexibility and ease of modification so they can deliver acceptable cash flow, maintain value, and maintain liquidity both before and after the implementation of GHG policies.

CNCo takes multiple steps towards reducing our emissions from operations and our effort towards increasing fuel efficiency are a good testament to that. We are also actively looking at the possibility of using biofuel and hydrogen as the alternative energy source. We are engaging with industry partners on advancing the new alternatives to fossil fuels and are constantly evaluating various options that will help us to decarbonise our business.