Introduction
According to the International Maritime Organization (IMO), the shipping industry currently accounts for 2.2% of global emission of greenhouse gases (GHG), with the potential, if left unregulated, to increase 50-250% by 2050. In response, the IMO has targeted a 50% reduction in GHG emissions by 2050 via its GHG Strategy, approved in April 2018.
Against this background, the Poseidon Principles for Marine Insurance (PPMI) came into force on December 15, 2021. The PPMI represents an insurance-based follow on of the impactful Poseidon Principles for Financial Institutions acceded to by 30 banks and financial institutions in June 2019. The original Poseidon Principles for Financial Institutions have set a course for the industry above IMO requirements and the PPMI, together with other initiatives like the Sea Cargo Charter, are fairleads guiding the shipping industry into compliance with the world’s most ambitious climate goals. The Poseidon Principles target a 100% reduction in GHG, or “net zero” carbon emission.1
In late September 2022, the Poseidon Principles for Financial Institutions and PPMI announced an even further benchmark of maximum temperature rise of 1.5°C above pre-industrial temperature levels by 2100. This benchmark may sound radical in a vacuum but compared against global projections seems prudent. Currently the Intergovernmental Panel on Climate Change (IPCC) projects a rise of 3°C by 2100 but contends that to stay in line with a 1.5°C goal, GHG emissions as compared with those in 2019 must fall 43% by 2030. Thus, though the Poseidon Principles extend beyond the IMO’s GHG Strategy, these goals are broadly in line with global climate objectives, and further are realistically styled so as not to be impossibly burdensome on the shipping industry.
What is the PPMI?
The PPMI are a global framework for assessing and disclosing the climate alignment of insurers’ hull and machinery portfolios. Upon the initiative’s launch in December 2021, the PPMI had 6 insurer Signatory members. The PPMI are applicable only to hull & machinery policies where a PPMI Signatory is lead insurer or, where the Signatory is a following insurer as long as the lead insurer is also a Signatory. The framework also allows for “affiliate members”, which are comprised of companies who facilitate and support hull and machinery insurance like brokerage firms and fixed premium P&I providers. As of publication there are now 9 Signatories and 9 affiliate members.2
The PPMI Signatories track vessels’ carbon intensity, which represents the total operational emissions generated to complete one unit of transport work. Put simply, this is how many grams of CO2 a vessel will emit to move one ton of goods one nautical mile. A vessel’s carbon intensity is measured as an Average Efficiency Ratio (AER), which is unit grams of CO2 per deadweight ton-nautical mile.3
The aim of tracking vessels’ carbon intensity, and aligning same with the PPMI trajectory, is to bring the shipping industry in line with its aforementioned 100% carbon emission reduction goal, which is the same standard as the 2015 Paris Agreement.4 This is a more stringent standard than current IMO GHG Strategy, but the IMO Data Collection System (DCS) is crucial for Signatories to track carbon intensity.
The trajectories are specific to ship type and size as well as technical and operational specifications. This is meant to prevent disadvantages to any one type of vessel in trajectory alignment; nevertheless, older vessels with higher fuel consumption rates will necessarily have higher AERs and may struggle to comply with trajectory alignments. Additionally, and perhaps ironically, though larger vessels may be notionally considered worse offenders of carbon emissions, economies of scale and the presence of far more tons over which the burn of fuel is divided indicate large vessels’ AERs are likely to be lower than smaller vessels. In any event, the PPMI acknowledges that the trajectories are likely to adjust after at least one year’s data is collected and the PPMI Signatories can assess whether the industry represented is in significant misalignment with climate goals. The PPMI’s Secretariat and official advisors envision periodic reassessment of trajectories based on developing climate and industry data.
What disclosure is required under the PPMI?
While PPMI Signatories are counting on IMO DCS to collect data for AER calculation, it is likely that 100% disclosure is unattainable. The PPMI have advocated for a standard covenant in hull policies that require information disclosure, but implementation of same is not required of the Signatories. Signatories will report to other PPMI members the percentage of their fleet for which no data is available, but this information is not required to be made public
In fact, the only information that will be available to the public are the PPMI Signatories’ overall climate alignment scores, which will be issued annually and based on the reported and accumulated data of the respective fleets they insure
If shipowners’ vessels are insured with a PPMI Signatory, disclosure should not represent a significant ESG burden above IMO requirements, especially as the IMO’s Energy Efficiency Existing Ship Index (EEXI) and Carbon Intensity Indicator (CII) plan reporting regulations come into effect in January 2023.
Would non-compliance with the PPMI void insurance?
There is no immediate threat of insurance disruption if a vessel owner is not immediately compliant with the PPMI’s desired trajectory. The PPMI’s primary enforcement tools are request of information under policies’ general provisions and a contemplated standard covenant for shipowners to disclose specific information for calculating AER. It is unlikely that Signatories will seek to amend any extant policies, and going forward Signatories are not required to implement the covenant, which itself implies room for negotiation and possible non-disclosure. However, as the shipping financiers behind the Poseidon Principles may become increasingly inclined to condition access to funding on compliance with groups like the PPMI, and the IMO increases its carbon regulation and data collection requirements, it will inure to the benefit of shipowners to proactively begin disclosure and self-assessment as soon as possible.
Questions?
Please contact any member of S&K's Maritime & Transportation Group.
1 These reductions are based on 2008 emissions data.
2 https://www.poseidonprinciples.org/insurance/members/.
3 gCO2/dwt-nm
4 The Paris Agreement entered into force on November 4, 2016 with 193 Parties comprised of 192 Signatory countries plus the European Union. https://www.un.org/en/climatechange/paris-agreement#:~:text=The%20Agreement%20is%20a%20legally,have%20joined%20the%20Paris%20Agreement.
