Reinventing the deal
Olivier Blanchet, Head of Jet & Yacht Finance Services, BNP Paribas, on how the banking system can drive positive changes for the yachting industry…
Climate change is forcing many sectors to reinvent themselves, and the yachting industry is no exception. Indeed, it’s facing one of its greatest challenges. The new constraints in terms of finance and corporate reporting related to CO2 emissions represent a structural rethinking. They also present an opportunity to promote the efforts made to decarbonise the sector and upgrade the business models in the maritime industry.
“The window to take urgent climate action is closing rapidly,” warned António Guterres, United Nations Secretary-General, in 2022. High-net-worth individuals (HNWIs) and developed countries find themselves in the midst of public scrutiny; they have the legal power and the financial means to make the appropriate changes, and the pressure will continue to increase.
Eco-activists are more organised, well advised and are increasingly successful in raising funds for their cause. If nothing changes, developed countries and HNWIs will be seen as responsible, increasing the perception gap between rich and poor.
The risk of disappearance is high, not just for industries, but also for entire ecosystems. ‘Sector transformation at full speed’ remains the key phrase. Today, the current trajectory doesn’t allow us to limit global warming to 1.5 degrees as determined during COP 21, and the world is more likely on course for a figure of more than four degrees. This is why public authorities have decided to speed up and leverage the banking system, helping them channel the money, the credits, and the investments to decarbonise the economy at full pace.
The winners will be those proactive in implementing what public authorities aim to achieve.
In this regard, the Net-Zero Banking Alliance, signed by BNP Paribas, along with 120 other banks representing 40 per cent of the global banking world, is a commitment to achieve carbon neutrality by 2050.
Net-zero, as defined by the Intergovernmental Panel on Climate Change (IPCC), is the balance achieved when greenhouse gas emissions are offset by their removal from the atmosphere, aiming to limit global warming to an increase of 1.5°C. Considering the figures published for each country and sector, the yachting industry will have to reduce its CO2 emissions by 80 per cent before 2050, based on the figures published in 2019.
European and UK public authorities have defined certain rules to report and communicate the efforts made by financial and non-financial companies. They apply to all companies with more than 250 employees, €40 million of revenues and a €20 million total balance sheet. If a company meets two of these three criteria, it has an obligation to report.
A corporate sustainability due diligence directive proposed in February 2022 fosters further sustainable and responsible corporate behaviour, and will also be enforced in the coming years.
"In the near future, yacht owners could be viewed as the guardian angels of the oceans, going beyond merely decarbonising their assets. This could transform a reputational constraint into a significant opportunity."
One of the immediate operational actions to be taken is the need to calculate the energy efficiency of any vessel above 400gt, benchmarked against a ship index. This has been mandatory since 1 January 2023, under the Marpol VI regulations. The (super)yachting industry can easily adapt this norm on a voluntary basis.
In 2022, BNP Paribas published its first Climate Analytics and Alignment Report, describing how the group will achieve its trajectory towards net-zero and begin applying this approach to its most carbon-intensive sectors. By 2024, the aviation and maritime sectors will be integrated into this approach, increasing our selectivity.
The procedure used is the PACTA methodology, a free, open-source tool that measures the alignment of financial portfolios with various climate scenarios consistent with the Paris Agreement. It was developed for COP21 with the support of the Greenhouse Gas Protocol and the International Organization for Standardization.
There are three types of emissions: direct emissions, which are easy to define and related to a company’s industrial processes; indirect emissions, those being the emissions of a company’s providers/suppliers (electricity suppliers, transport of spare parts); and indirect emissions occurring in the value chain, including both upstream and downstream, classified into 15 categories.
For example, shipyards have a distribution of CO2 emissions mainly represented by indirect emissions: those of suppliers and subcontractors and ones coming from the output of the yachts and superyachts themselves. BNP Paribas selects future emissions scenarios, sets a target to reduce financed emissions, and then determines how to reduce the carbon intensity of our portfolios. This means, for instance, that we will reduce our finance advance ratio on secondhand vessels over five years old without significant upgrades or refits.
We strongly believe that the current evolution will impact the secondhand value of existing yachts and will influence the advance ratios that banks will provide in terms of financing. For example, we promote the yachts and superyachts that have better efficiency in terms of GT per nautical mile. We also focus only on yacht managers who have adopted an ISO 14064 and ISO 50001 approach, just like the shipyards.
In other words, nowadays, financial institutions incorporate non-financial criteria into how they structure financing transactions. They are more selective, considering the yacht itself, technical yacht managers and shipyards in their evaluations.
Shipyards have a duty of care to communicate their CO2 emissions and commit to a net-zero carbon objective by 2050, setting intermediary targets for themselves and extending this scope to their providers and products.
BNP Paribas Jet & Yacht Finance has defined its methodology in four steps:
• Define the assessment framework and consider the direct emissions in the assets we finance.
• Collect data from the captains and yacht managers. BNP Paribas has a duty to collect relevant CO2 emissions from its clients, weigh them against loan exposure, calculate a carbon-intensity ratio at the portfolio level and compare these ratios with decarbonisation trajectories set by the IMO for 2050.
• Define and align our CO2 trajectory in accordance with the bank strategy and IPCC recommendations.
• Refine our credit policy to improve the carbon intensity of our portfolio. We aim to increase our due diligence on yacht managers to reduce the environmental footprint. Additionally, we plan to fine-tune our loan documentation to integrate environmental constraints such as on hazardous substances, spill prevention, control plans, crew training and waste-management systems.
The best way to maintain a constructive dialogue with the public and regulators is to provide facts and disclose progress, which must be endorsed by a recognised sustainability watchdog, to contribute to improving the image of the yachting industry.
We strongly believe there is a significant opportunity for yacht owners today. In the near future, they could be viewed as the guardian angels of the oceans, going beyond merely decarbonising their assets. This could transform what is currently a reputational constraint into a significant opportunity.
In other words, let’s create a sustainable use value attached to the yacht and its owner. The demands of the new UHNWI generation will undoubtedly move in this direction. The interior outfitting, the nature of the sea toys and the type of entertainment on board are set to evolve in the coming years.
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