ESG regulation reshaping LNG bunkering finance

Wednesday, 23 August 2023 07:27
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Financing for new LNG bunkering projects is undergoing rapid evolution as environmental, social, and governance (ESG) considerations become increasingly paramount, reshaping decision-making processes and outcomes. 

This trend, which is mirrored in the broader energy industry, is pushing project financiers and investors to take a deeper look at the sustainability credentials of the projects they back and go beyond mere compliance to measure the long-term sustainability impact of their investments.

This shift in focus is not without implications for the cost dynamics of LNG bunkering projects.

LNG bunkering at the Port of Rotterdam

"As sustainability risks become increasingly central into investment decisionmaking processes (and as the cost of polluting soars amid increasingly stringent emission reduction requirements), the cost-competitiveness of LNG bunkering projects will start to decline significantly," Matteo Ilardo, Europe Analyst at RANE, tells LNG Journal.

In this changing landscape, projects that can demonstrate strong ESG credentials and innovative practices for reducing environmental impact are likely to attract easier access to financing and possibly at lower costs.

The converse, however, could mean financing challenges for projects lacking in these areas, a reality that underscores the importance of integrating sustainability into LNG project planning and execution.

"If we try to identify winners and losers,” Ilardo says, “projects with more robust ESG credentials and/or early adopters of innovative technologies/practices that reduce the environmental impact of LNG as a maritime fuel will be viewed more favourably by lenders and may benefit from comparatively easier access to financing at potentially lower costs.”

Lower emissions will obviously be a key metric, but Ilardo also points out that finance providers will increasingly demand to see reporting systems and evidence of effective climate and transition risk management.

This is likely to include measures to prevent/reduce leakage, onboard carbon capture systems, and a clear pathway to increase use of bioLNG or sustainable synthetic alternatives.

Regulatory challenges

Long touted as a “bridge fuel” to a low-carbon future, LNG has faced relatively little competition in the past as it was normally compared to highly polluting marine fuel oil. However, as new alternative fuels come to market and ESG requirements for financing tighten the landscape is subtly shifting. 

“Through the next decade at least (ignoring for a moment LNG's actual environmental impacts), LNG should nevertheless remain the most cost-effective option to meet compliance requirements considering the overall regulatory landscape in the EU as it has lower emissions than heavy fuel oil,” Ilardo comments. 

The EU’s Sustainable Finance Disclosure Regulation (SFDR), introduced and revised in recent years, exemplifies the changing landscape.

Enacted as of March 2021, the SFDR is a statutory instrument known as a Delegated Act containing more precise disclosure standards.

The latest revisions were launched in February this year and tighten the requirements for new projects, outlining a range of new considerations for investment decision-makers.

"For now, SFDR mostly just creates extra administrative burden to meet new reporting and disclosure requirements," Ilardo explains, adding that these requirements fall on both the companies, who must assess and disclose their ESG performances, and investors who need to interpret these performances.

However, the SFDR is more than just a reporting requirement. It serves as an indicator of the future direction of travel and the potential risks and rewards this entails.

As regulatory bodies around the world follow in the footsteps of the European Union, the impact of such regulations is likely to grow. 

“The wider trend it speaks of and the uncertainty it brings carry far greater implications for shipping financing strategies,” Ilardo notes.

Part of the EU's Sustainable Finance agenda, the SFDR was introduced by the European Commission as a core part of its 2018 Sustainable Finance Action Plan, which also includes the Taxonomy Regulation and the Low Carbon Benchmarks Regulation.

Despite its current limited impact, it lays the groundwork for future regulatory change and it is clear that investors will need to adapt to the shifting landscape influenced by ESG considerations and regulations like the SFDR.

Increased competition 

As the industry shifts, the competition for LNG projects is also growing.

These projects are no longer competing only with traditional fossil fuels but also with alternative and renewable energy sources that are emerging as viable options.

These include hydrogen, ammonia, biofuels, and potentially in the future, fusion and advanced battery technologies.

"While a costlier option, having LNG-fuelled ships retrofitted to run on zero-emissions fuels such as ammonia could reduce the risk for those vessels to become stranded assets as the industry moves towards decarbonization," Ilardo suggests.

Such a transformation would mean a complete overhaul of the vessel's engine system, an expensive prospect, but one that could potentially secure the ship's operational viability in a zero-carbon future.

This also represents a new dimension of competition, as traditional and alternative fuels vie for dominance in the new era of sustainable shipping.

LNG projects will need to showcase not only their immediate sustainability credentials but also their long-term compatibility with the shifting energy landscape.

Moreover, the competitiveness of LNG projects could be challenged by the increasing pressure on financial institutions to divest from fossil fuel projects.

As the regulatory environment changes and as pressure from stakeholders and the public increases, banks and financial institutions may be more cautious in funding LNG projects.

The next decade will undoubtedly be pivotal in shaping the future of LNG's role in the global transport system, with the evolving financing landscape underpinned by stringent ESG considerations and regulatory changes like SFDR.

“Projects that do not score well…may face challenges in securing financing as lenders would perceive them as carrying higher potential for reputational damage and regulatory uncertainty,” Ilardo cautions.

As a result, LNG project developers and operators will need to adapt to these changes, proving their robust ESG credentials and demonstrating innovative sustainability practices to secure financing.

Last modified on Thursday, 24 August 2023 09:02

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