IMO 2020: The Big Shipping Shake-Up
Over 90% of all global trade takes place on our oceans.
Unfortunately, the network of 59,000 vessels powering international commerce runs on sulfur-laden bunker fuel, and resulting emissions are causing problems on dry land.
As today’s infographic by Breakwave Advisors demonstrates, new emissions regulations taking effect in 2020 will have a big impact on the world’s massive fleet of marine shipping vessels.
The Regulatory Impact
The International Maritime Organization (IMO) – the UN agency responsible for ensuring a clean, safe, and efficient global shipping industry – will be implementing new regulations that will have massive impact on maritime shipping.
The regulations, dubbed IMO 2020, will enforce a 0.5% sulfur emissions cap worldwide starting January 1, 2020 ─ a dramatic decrease from the current emissions cap of 3.5%.
Here are a few ways marine fuel will likely be affected by these regulations:
- High-sulfur fuel oil will drop in price as the demand drops dramatically after January 1, 2020
- Diesel, a low-sulfur fuel oil, will be in higher demand and should see a price increase
- Refiners should also expect higher profits as refining runs increase to satisfy the new regulations
The Economic Impact
IMO 2020 will be one of the most dramatic fuel regulation changes ever implemented, with a significant impact on the global economy.
New regulations are certain to influence freight rates ─ the fees charged for delivering cargo from place to place. These rates can fluctuate depending on:
- Time and distance between ports
- Weight and density of the cargo
- Freight classification
- Mode of transport
- Tariffs and taxes
- Fuel costs
Rising fuel costs means rising freight rates, with much of these costs being passed to consumers.
In a full compliance scenario, we estimate the total impact to consumer wallets in 2020 could be around US$240 billion.
─ Goldman Sachs
The Environmental Impact
Not surprisingly, the world’s 59,000 transport ships, oil tankers, and cargo ships have a consequential impact on the environment.
Bunker fuel accounts for 7% of transportation oil consumption (~3.5 million barrels/day). Burning this fuel generates about 90% of all sulfur oxide and dioxide (SOx and SO2) emissions globally. In fact, the world’s 15 largest ships produce more SOx and SO2 emissions than every car combined.
These sulfur emissions can cause several harmful side effects on land ─ acid rain, smog, crop failures, and many respiratory illnesses such as lung cancer and asthma.
Changing Currents in the Shipping Sector
As IMO 2020’s implementation date nears, shippers have a few courses of action to become compliant and manage costs.
1) Switch to low-sulfur fuel
Bunker fuel use in the shipping industry was 3.5 million barrels per day in 2018, representing roughly 5% of global fuel demand.
Annual bunker fuel costs are predicted to rise by US$60 billion in 2020, a nearly 25% increase from 2019. Price increases this significant will directly impact freight rates ─ with no guarantee that fuel will always be available.
2) Slower Travel, Less Capacity
The costs of refining low-sulfur fuel will increase fuel prices. To offset this, shippers often travel at slower speeds.
For example, large ships might burn 280-300 metric tons of high-sulfur fuel oil (HSFO) a day at high speeds, but only 80-90 metric tons a day at slower speeds. Slower travel may cut costs and help reduce emissions, but it also decreases the capacity these vessels can transport due to longer travel times, which shrinks overall profit margins.
3) Refueling Detours
Adequate fuel supply will be a primary concern for shippers once IMO 2020 takes effect. Fuel shortages would cause inefficiencies and increase freight rates even more, as ships would be forced to detour to refuel more often.
4) Installing Scrubbers
A loophole of IMO 2020 is that emissions are regulated, not the actual sulfur content of fuel itself.
Rather than burning more expensive fuel, many shippers may decide to “capture” sulfur before it enters the environment by using scrubbers, devices that transfer sulfur emissions from exhaust to a disposal unit and discharges the emissions.
With IMO 2020 looming, only 1% of the global shipping fleet has been retrofitted with scrubbers. Forecasts for scrubber installations by mid-2020 run close to 5% of the current ships on the water.
There are a few reasons for such low numbers of installations. First, scrubbers are still somewhat unproven in maritime applications, so shippers are taking a “wait and see” approach. As well, even if a ship does qualify for a retrofit, cost savings won’t take effect until several years after installation. On the plus side, ships with scrubbers installed will still be able to use the existing, widely-available supply of bunker fuel.
No matter which route shippers choose to take, the short-term impact is almost certainly going to mean higher freight rates for the marine shipping industry.
UN Sustainable Development Goals: How Companies Stack Up
Are companies making progress in meeting the UN Sustainable Development Goals? This tracker shows how companies are measuring up.
The UN SDGs: How Companies Stack Up
Environmental, social, and governance (ESG) investing witnessed a breakthrough year in 2020 with the most fund inflows on record.
Importantly, for companies that are judged according to ESG metrics, one way to track their progress is through their alignment to the UN Sustainable Development Goals (SDGs).
Established in 2012, the UN SDGs are a blueprint for creating a more sustainable future by 2030 that have been adopted by 193 countries worldwide.
As investors and stakeholders pay closer attention to sustainability concerns, this graphic from MSCI breaks down how companies stack up according to their alignment to the UN SDGs.
How Were Companies Measured?
To track companies net contribution to the UN SDGs, companies were scored by their positive or negative contribution to each of the 17 goals.
The 17 UN SDGs are designed to achieve three primary objectives by 2030:
- Protect the planet
- End poverty
- Create prosperity and peace for all
Specifically, the framework centers on a discussion paper that was developed in partnership with the OECD in 2018. Company policies, operations, products and services, and practices are analyzed according to reported and publicly available information.
Tracking the Alignment of Companies
Across a universe of 8,550 companies in the MSCI All Country World Index, constituents were measured from strongly aligned to strongly misaligned to the UN SDGs.
|3||Good Health and Well-being||0||315||141||29|
|6||Clean Water and Sanitation||17||325||36||10|
|7||Affordable and Clean Energy||43||639||109||587|
|8||Decent Work and Economic Growth||25||1269||52||17|
|9||Industry, Innovation, and Infrastructure||68||844||137||9|
|11||Sustainable Cities and Communities||0||0||167||19|
|12||Responsible Consumption and Production||115||855||150||598|
|14||Life Below Water||0||36||151||92|
|15||Life on Land||0||0||128||17|
|16||Peace and Justice Strong Institutions||0||135||241||27|
|17||Partnerships to Achieve the Goal||0||401||152||22|
Source: MSCI ESG Research LLC as of August 11, 2020
Broadly speaking, companies fell mostly in the middle—roughly 38% were aligned while almost 55% were misaligned or neutral. Meanwhile, just 0.2% of companies were strongly aligned to the UN SDGs.
Overall, one of the most strongly aligned goals was Responsible Production and Consumption, with 115 companies meeting this criteria. Specifically, these include companies that are building sustainable infrastructure, energy efficiency, or creating green jobs.
Interestingly, the worst performing goal was also Responsible Production and Consumption, with over five times as many companies (598) strongly misaligned. Along with this goal, both Climate Action and Affordable and Clean Energy each had over 500 companies strongly misaligned.
UN SDGs: A Sector Focus
Unsurprisingly, SDG-alignment varied widely according to company sectors.
Educational companies, for instance, represented the highest level of alignment to Gender Equality. Meanwhile, 18% of 425 utilities companies assessed ended up aligning with Clean and Affordable Energy goals.
As one would expect, the energy sector lagged behind. In 2020, fossil fuels were a key source of revenue for 91% of the companies in the energy business. In fact, just three companies derived over 50% of their revenues from green alternatives: REX American Resources, Renewable Energy Group, and Verbio.
A Call to Action?
Despite the growing wave of interest in ESG investing, the reality is that progress to meet the UN SDGs has been slower going than expected.
However, a greater number of individuals, stakeholders, and activists are sounding the alarm. Today, over 3,000 signatories representing trillions in assets under management have committed to the UN Principles of Responsible Investment, which has established six key actions for ESG investing. Now, many companies are required to report their ESG disclosures in Europe.
Along with these key markers of progress, investors can move the dial by tracking a company’s alignment to sustainable development goals.
Mapped: The Greenest Countries in the World
The world’s growing focus on sustainability is a clear sign of the times. This map ranks the 40 greenest countries in the world.
Mapped: The Greenest Countries in the World
From widening wealth disparity to the environmental ramifications of economic development—the growing focus on global sustainability is a clear sign of the times.
Research reveals that when a sustainable ethos is applied to policy and business, it typically bodes well for economies and people alike. By providing benchmarks for those decisions, indexes like Yale’s Environmental Performance Index (EPI) can be critical to measuring national sustainability efforts.
The above map interprets the EPI ranking of 180 economies across 32 environmental health indicators by narrowing in on the top 40 greenest countries.
Who’s the Greenest of them All?
Despite the decades-long trend of globalization, national environmental policies have proved to be widely divergent. The EPI report confirms that those policies—and their positive results—are highly correlated with national wealth.
This is evidenced in the global EPI distributions, seen below:
|OVERALL RANK||COUNTRY||SCORE||REGIONAL RANK|
|24||United States of America||69.3||21|
|42||United Arab Emirates||55.6||2|
|63||Antigua and Barbuda||48.5||10|
|65||St. Vincent and Grenadines||48.4||11|
|69||Trinidad and Tobago||47.5||14|
|78||Bosnia and Herzegovina||45.4||18|
|119||São Tomé and Príncipe||37.6||10|
|124||Central African Republic||36.9||12|
|125||Dem. Rep. Congo||36.4||13|
|146||Papua New Guinea||32.4||20|
|154||Republic of Congo||30.8||26|
Regional grouping in the report include: Global West, Asia-Pacific, Eastern Europe, Former Soviet States, Greater Middle East, Latin America & Caribbean, Southern Asia, and Sub-Saharan Africa
Scandinavian countries, which tend to have a high GDP per capita, show strong and consistent results across EPI parameters. Denmark for instance—which ranks first overall—leads the world in slowing its growth in CO2 emissions. Meanwhile, neighbor Sweden leads in landfill and recycling treatment, while wastewater treatment is led by a handful of countries within and beyond Scandinavia including Denmark, Finland, the Netherlands, Singapore, and Sweden.
In North America, Canada claims top spot in the biodiversity and habitat category, while the U.S. ranks sixth in agricultural diversity globally. In Asia, Singapore leads the world in fishery health and sustainability.
Ultimately, it appears the world’s greenest countries tend to focus on all areas of sustainability, while laggard countries show more uneven performance across categories.
What Does “Green” Mean?
Each high-level performance indicator with the EPI, like “environmental health”, is broken into subsections. Nations are scored on each subsector on a scale up to 100. As a result, multiple countries can rank first in any given category.
By evaluating national sustainability on a scale that is unrelated to other nations, we get a clearer idea of comparative national progress, beyond a basic ranking.
For instance, 30 countries tie for first in marine protection, all with scores of 100. This shows that many economies are prioritizing this area of sustainability.
The EPI categories and subsectors are shown in the diagram below:
Each section is weighted differently, and is reflected as a percentage within the index. For example, Ecosystem Vitality accounts for 60% of the EPI, Climate Change makes up 24% of a country’s score, and CO2 emission reduction is weighted at 13.2%.
The Cost of Being Green
Infrastructure costs are one reason why wealthier nations tend to fare better across sustainability measures. Everything from air pollution reduction and water treatment, to hazardous waste control and mitigation of public health crises are especially expensive—but have a huge potential impact on citizens.
This trend can be seen the scatterplot, which demonstrates the distribution of economies evaluated by the EPI:
For a more detailed look, the table below highlights the GDP per capita of each of the top 40 greenest countries, based on data from the World Bank and Statista:
|COUNTRY||EPI SCORE||GDP Per Capita||RANK|
|United States of America||69.3||65,298||24|
Despite the strong correlation between GDP per capita and EPI score, developing countries do not have to abandon sustainability efforts. China for instance leads the world in the adoption of electric vehicle technology.
Although some rankings can seem prosaic, indexes like the EPI provide a helpful benchmark for economies to compare efforts. It also allows governments to iterate and build upon environmental strategies and investments by highlighting what is and isn’t working.
CO2 emissions, for instance, are a major driver of climate change. Although the global economic stall has led to a temporary dip of CO2 emissions in early 2020 (a slower growth rate than the 11% expected rise), global emissions still continue.
However, the EPI shows that investments have impact. High-level sustainability efforts—political commitment, media coverage, regulations—can deliver results, even at the grassroots level.
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