chevron in light blue
Dec 4, 2023
Lockton Edge

ESG – more expected of P&I Clubs

The European Union’s Emissions Trading System (EU ETS) was extended to cover emissions from shipping as of 1st January 2024.

The EU ETS is limited by a 'cap' on the number of emission allowances. Within the cap, companies receive or buy emission allowances, which they can trade as needed. The cap decreases every year, ensuring that total emissions fall.

Each allowance gives the holder the right to emit:

  • One tonne of carbon dioxide (CO2), or;
  • The equivalent amount of other powerful greenhouse gases, nitrous oxide (N2O) and perfluorocarbons (PFCs).
  • The price of one ton of CO2 allowance under the EU ETS has fluctuated between EUR 60 and almost EUR 100 in the past two years. The total cost of emissions will vary based on the cost of the allowance at the time of purchase, the vessel’s emissions profile and the total volume of voyages performed within the EU ETS area. The below is for illustration purposes:
  • ~A 30.000 GT passenger ship has total emissions of 20.000 tonnes in a reporting year, of which 9.000 are within the EU, 7.000 at berth within the EU and 4.000 are between the EU and an outside port. The average price of the allowance is EUR 75 per tonne. The total cost would be as follows:
  • ~~9.000 * EUR 75 = EUR 675.000
  • ~~7.000 * EUR 75 = EUR 525.000
  • ~~4.000 * EUR 75 * 50% = EUR 150.000
  • ~~Total = EUR 1.350.000 (of which 40% is payable in 2024)
  • For 2024, a 60% rebate is admitted to the vessels involved. However, this is reduced to 30% in 2025, before payment is due for 100% with effect from 2026.
  • Emissions reporting is done for each individual ship, where the ship submits their data to a verifier (such as a class society) which in turns allows the shipowner to issue a verified company emissions report. This report is then submitted to the administering authority, and it is this data that informs what emission allowances need to be surrendered to the authority.
  • The sanctions for non- compliance are severe, and in the case of a ship that has failed to comply with the monitoring and reporting obligations for two or more consecutive reporting periods, and where other enforcement measures have failed to ensure compliance, the competent authority of an EEA port of entry may issue an expulsion order. Where such a ship flies the flag of an EEA country and enters or is found in one of its ports, the country concerned will, after giving the opportunity to the company concerned to submit its observations, detain the ship until the company fulfils its monitoring and reporting obligations.
  • Per the EU’s Implementing Regulation, it is the Shipowner who remains ultimately responsible for complying with the EU ETS system.

There are a number of great resources on the regulatory and practical aspects of the system – none better than the EU’s own:

Lockton Global Marine during the autumn held a series of discussions in Bergen, Oslo and Copenhagen. Attendees included many shipowners as well as representatives from the legal and banking community. Each meeting included a Q&A session on the pressing topics in the P&I sector. The subjects of our interview sessions included Audun Pettersen – Chief Underwriting Officer Gard, Greg Thomas – Chief Business Development Officer Skuld, Paul Jennings and Jeremy Grose – Joint Managing Directors at NorthStandard.

Ahead of each meeting the sources quoted below had received Lockton’s questions and had an opportunity to prepare. Although the executives were interviewed separately and in different locations, the questions were fundamentally the same. In this and subsequent articles we shall be sharing the comments provided to Lockton questions.

It should be noted that the three clubs interviewed are respectively number 1, 2 and 4 in the International Group measured in revenue. As such the view expressed are significantly made from a large club perspective. By the same measure the three clubs simultaneously represent 48.5% of the International Group membership.

The interviewer was Lockton’s Stephen Hawke, Managing Director Lockton PL Ferrari, London.

The Question

Stephen Hawke (Lockton)

“How can the Clubs help or assist in practical terms our clients and their members to be able to deal with the pressures relating to the environment that are brought on both ethically and by regulation? The Clubs are obviously in a good position to be able to do that, but we wonder sometimes that the industry is just ticking boxes, paying lip service, a couple more trees planted in the Amazon. Is there more that we can do than that?

Supporting new technology, for instance, looking at discounts maybe for people who are investing significant capital expense on compliance and moving towards new technology. Can that, should that be recognised in a premium way or other mechanisms?”

We need to avoid greenwashing.

Jeremy Grose (NorthStandard) “We need to avoid greenwashing. I personally think we should definitely be avoiding any sort of vain attempts to get involved in pretending to do things which we're not really doing.”

“We're not there, I don't think, to advise people how to go through the carbon fuel transition, there are going to be lots of issues that arise as they grapple with that, and other people can advise them as to what the right way to go through that is. But I don't think we have the expertise or the knowledge to be able to provide that the insight for them to guide them through that.”

“I'm not convinced that we need to be developing the sort of knowledge that will allow us to tell people what they should be doing around that fuel transition.”

...there are mechanisms in place that will change the shipping sector.

Audun Pettersen (Gard) considered that the Gard are way past the point of box ticking at this point. “There is a tremendous attention on the topic. There is a lot of drive also in the Board on those issues.” Asked whether Gard in some future might withdraw from insuring carbon-based cargoes Pettersen noted “We are a member-controlled group and so we do what the members want us to do. That is the starting point, but I think everyone in the industry is interested to see change, and the movement into the green transition. There is no way around it and there are mechanisms in place that will change the shipping sector. And I think all the clubs, including ours, need to be on board and we do whatever we can, where we can, to do it. We need to assist our members as much as we can when it comes to new fuels, new vessels, new technology…”

...we need all hands on deck on this.

Paul Jennings (NorthStandard) noted "It's not for us to say we're not going to insure ships that are carrying crude, or ships that are carrying coal, or if  their energy efficiency rating is lower than somebody else’s. I think we're into almost the dark fleet thing, if we as an international group start taking that view, where do these ships go for insurance? And how can we then be sure that they're being insured in a place where the marine environment will be protected in the event of an incident, and that safety at sea will be paramount to them?“

He added that he felt it was unnatural to “…be wielding the big stick and saying you have to do it or we're not covering it, providing they're engaging in lawful trades. I don't think that's our role."

Shipowners and banks in the audience took the view that more was expected of the P&I Clubs. A shipowner commented the Clubs needed to recognise their role as influential players and said on the issue “I think we need all hands on deck on this”.

A member of the audience pointed out that in the banking industry lenders were issuing sustainability loans so reinsurers or the capital behind them might well take a different view and more actively support sustainable shipping. Again, in banking funding tended to be cheaper “when you were one of the good guys”. He suggested as a consequence that an engagement in this area might increase access of available reinsurance capital, and that Clubs might benefit from thinking about preferential terms or pricing to encourage the ESG transition.

Paul Jennings (NorthStandard) agreed and commented “it could well be going forward certain segments of the reinsurance market won't want to reinsure us as the international group if we are providing cover to ships carrying fossil fuels” but he also believed this was not likely to be a significant factor soon as the world would be dependent on fossil fuels for a long time.

It was suggested that the issue might not be a matter of either or, but that the possible enhanced availability of sustainable reinsurance capacity could lead to a difference in costs with individual fleets accessing different reinsurance programs depending on their ESG rating. This in turn might cause the clubs to assess their overall portfolio, and segments and fleets therein, against ESG performance using the systems that were now available, and with that factor in ESG in their reinsurance strategies.

Jeremy Grose (NorthStandard) noted that the Clubs ability over time to buy reinsurance “will be affected by our ability to demonstrate that we are actually insuring ship owners who are on that fuel transition”.

It was also noted that a leading Scandinavian shipowner had recently assigned a series of newbuildings to clubs based on the level of proactivity and engagement in the ESG area, so commercial factors might play a role in how Clubs position and engage.

...the industry is going to have to look at the carrot more than the stick.

Anders L Johannessen (Lockton) suggested that a higher level of pro activity would be required “What I don't think is we can sit at the end of the table and look across at shipowner and say that this is their problem. We all know it’s there. We all acknowledge something has to be done, so we all need to fix it. And the industry is going to have to look at the carrot more than the stick.”

He proceeded to make the observation that if insurance as an industry, including its brokers, wanted to be truly carbon neutral and similarly support its client industry it needed to consider its relative proportion of the value chain emission and offset against that as mandated for instance by EU ETS. This would be a fairly significant amount of money where the Clubs would be driven towards reducing these costs by enhancing the ESG profile of its insured fleet.

[Sustainability] sits front and centre of what we do...

Greg Thomas (Skuld) observed that the question of sustainability “has been on our agenda for five years” and that the issue “sits front and centre of what we do without disregarding of course what we do day to day with everything else in shipping and energy”

He viewed that Skuld has a refined and clear sustainability report as part of Skuld’s annual report. “So it's integrated into our business. And so is translating the vision  we have for sustainability ESG overall into good business practice I think as a marine insurance it’s incumbent on us that we try our best to support the new technologies that are being developed and rolled out.”

Asked what practical applications Skuld’s position on sustainable development have he commented that “we've been quite bold with some of the decisions that we've made to support unproven technology, particularly being rolled out here in Scandinavia, to some extent acting as a buffer in terms of how they may or may not operate.”

Lockton commentary – what are the Clubs saying?

There is consensus that the industry should not pretend it is doing something that it isn’t. The Clubs also agree that they will try to insure new technologies and fuels as they emerge.

Whilst the Clubs aims to be responsive to shipping industry’s challenges, it does not as a whole see the offering of proactive advisory services on the energy transition to be a part of P&I’s role. However, it is also noted the Clubs are member controlled, there is recognition there is a need for change and as such Clubs will do what members want.

As yet there are no mechanism and no plans for commercially addressing differences in energy efficiency rating through differentiated rating or conditions. However, there appears to be differences between the Clubs on the amount of focus the energy transition is afforded, and how pro-active and experimental they are prepared to be in insuring new technologies.

At the same time the Clubs note that some reinsurers going forward may withdraw capacity for vessels with poor ESG rating, or vessels carrying fossil fuels, and with that reduce the amount of capacity available for some vessels, and possibly also for individual clubs’ portfolios based on that Club’s ESG activities.

It is clear, given the influence the P&I industry has with 90% of the world fleet as its clients, that there is an expectation of a wider engagement and that the often-mentioned collective industry voice should be used addresses the matter.

With the IGA through its policies champions environmental protection, should not protection of the climate be a focal point in its priorities?

Lockton Global Marine has also recently published the 2023 P&I Market Review. For further information, please visit the Lockton Protection & Indemnity page, or contact:

Stephen Hawke
Managing Director Lockton P.L. Ferrari, London
Tom Midttun
Head of Production Global Marine