Nils Anderson, the CEO of AP Moller Maersk, spoke at this month’s BSR Conference in New York City and articulated his company’s aspiration to be “Taking the lead in a world of change.”  This company represents the ultimate player in global trade. And, if one subscribes to the economic theory of comparative advantage, then the work of Maersk and the other shipping companies of the world are a source of global prosperity.  But, the question posed to Mr. Anderson the other day about the extent to which a more sustainable world demands more local supply dynamics and reduced consumption and transportation is a fair one. It also begs another question:  What is “Sustainable Shipping?”

Ever since the era of Christopher Columbus, Vasco da Gama, Ferdinand Magellan, and many others who bravely pioneered intercontinental navigation and exploration, shipping has emerged as a vital industry catalyzing global commerce, cultural exchange, and economic development. Today, though over 100,000 commercial ships carry 9.2 billion tons of goods and 80% of global merchandize trade by volume worldwide each year, the broader impact of shipping is sometimes overlooked.1, 2 In the coming decades, the industry will undergo a variety of challenges, and those players who take a lead embracing “sustainability” potentially have a better chance to survive and prosper.

The shipping industry is susceptible to evolving global economic conditions, trade patterns and policies, and labor supply. On one hand, growth in free trade and the accelerating influence of the BRIC countries and other emerging markets economies will probably spawn higher trade volumes, leading to new potential routes and markets and greater trade demands.3 On the other hand, unexpected economic contraction, the rise of local, national, and regional protectionism, as well as prolonged poor international ocean and maritime governance, may reduce overall shipping demands and thwart investment. Furthermore, because both sector-wide labor standards and coordinated training are inadequate, and conditions for work are often deemed disagreeable, the industry shows high employee turnover and struggles to attract skilled workers. Recruitment and labor expenses are also on the rise, with workers in developing economies calling for higher pay and better employee rights.4

Currently, shipping contributes to about three percent of global CO2 emission and has a significant impact on the environment.5 Compared to aviation and land-based transportation, ocean shipping at the present is subject to less stringent environmental demands. However, the public awareness spotlight has progressively fallen on shipping, and a cascade of proactive efforts to encourage sustainability improvements have emerged: some promote research and innovation, some champion corporate social responsibility and marketing, others campaign for international regulation and compliance.

Though prolific, these initiatives are often piecemeal, fragmented, country specific and ad hoc, and they may burden shipping companies with duplicated and unnecessarily complex compliance standards.6 The Sustainable Shipping Initiative and World Wildlife Fund for Nature recognize this predicament and advocate the development of holistic, coordinated global legislative standards.6 The International Maritime Organization (IMO), a United Nations agency, has developed the Energy Efficiency Design Index related to new vessel designs, and is likely to toughen more specifications.7

Pressures for action towards higher environmental and ocean governance standards also arise from governments and the landside supply chain: Wal-Mart, for instance, is insisting on better sustainability tracking and performance from its suppliers.8 As oil prices and oil price volatility may escalate in the medium term, there is a compelling cost-saving incentive to find technological solutions to improve energy efficiency in new ship designs and shipping operations.

Arguably, shipping has not engaged in a major technological advancement since McLean Trucking developed the business model for containerization in the 1950s.9 Though many effective solutions to make ships more sustainable, such as engine modifications, new voyage optimization systems, are already available. And the IMO has estimated that 10-50% cost effective fuel saving can be accomplished by designing better vessels alone.10 Nonetheless, shipping as a multifaceted industry suffers split incentives, where the divergent interests of the owners, the managers, and the charterers cause structure barriers for changes to be implemented.11 Overcoming these barriers may require not only the regulatory development, but also collaboration across the industry and especially among leaders.

Confronted with challenges, companies that fail to react promptly and effectively will be vulnerable to competition, while ones that innovate and demonstrate strong leadership adapting to the rapidly transforming operating context will thrive. For an industry where social and environmental responsibilities is growingly inseparable with profitability, an overarching motif of sustainability delineates its future. For investors, it is necessary to place closer scrutiny of shipping companies’ preparations for the changing markets, plans to comply with stricter regulations, commitment to improving fuel efficiency, and response to higher demands on environmental and social performance.

In the final analysis, the economic and profit outcomes for companies in this industry will be predicated upon their ability to balance the near term imperatives of day-to-day operations, and the long-term vision for global trade and prosperity.  Companies which constantly challenge themselves to aggressively improve energy efficiency, ship and container designs, to balance the logistics and pricing matrix for customers, to explore the value of ecosystem services, to understand and respect community relations, and to hold themselves accountable while working towards transparency, are the companies which can garner the respect and support of the world’s capital markets.

Each month in the Cornerstone Journal of Sustainable Finance & Banking (JSFB), we will offer thoughts on a “Featured Domain,” which is selected from our proprietary “Sustainable Domain Bank.”  The Cornerstone “Sustainable Domain Bank” contains 2,000+ addresses on the Internet, which are an articulation of business processes, business practices and aspirations for a more regenerative form of capitalism. Many of these domain names have the potential to be developed into business plans reflecting a robust interpretation of sustainable capitalism and finance.  In particular, each “Sustainable Domain” captures a principle, or reflects a value inherent in the systematic understanding of the Environmental, Social and Governance (ESG) imperatives facing businesses and the economy today.  Each Domain is intended to facilitate dialogue across functions and sectors of the capital markets; and each is available for collaborative partnership, purchase or transfer should it have particular appeal to Cornerstone clients and colleagues.  

Dehao (Andy) Zheng is a Research Associate at Cornerstone Capital Inc.
 
Erika Karp is the Founder & Chief Executive Officer of Cornerstone Capital Inc. and the former Head of Global Sector Research at UBS Investment Bank.

 

References

1 UNCTAD, Review of Maritime Transport, 2013
2 UNCTAD, Review of Maritime Transport, 2010
3 Global Finance, Special Reports: BRICs
4 The Financial Times, China workers get to grips with rights
5 The IMO, Second IMO GHG Study 2009
6 WWF, Global Sustainable Shipping Initiatives: Audit and Overview 2011
7 The IMO, EEDI – rational, safe and effective
8 The New York Times, At Wal-Mart, Labeling to Reflect Green Intent
9 The Economist, The green ocean strategy: Four questions for Signe Bruun Jensen, Senior Global Adviser,
10 The IMO, MEPC 62/INF.7, Reduction of GHG Emissions from Ships: Marginal Abatement Costs and Cost Effectiveness of Energy-Efficiency Measures
11 Ni. Rehmatulla, T. Smith, P. Wrobelb at Low Carbon Shipping Conference, London 2013, Implementation Barriers to Low Carbon Shipping