DNV: As in other industries, ESG reporting in the shipping sector not only covers emission-related criteria but also recycling as one important part of asset life cycle management. What are the ESG risks related to ship recycling?
Jannicke Eide-Fredriksen: Many shipowners have policies for responsible ship recycling, but the majority of ships are still recycled in facilities which do not meet basic health, safety and environmental requirements. Recycling volumes are expected to significantly increase in the coming years, and shipowners need to navigate a complex regulatory landscape where it is difficult to know the standards of the different ship recyclers. International regulations governing recycling are defined in the IMO Hong Kong Convention (HKC), which has yet to be ratified by a sufficient number of state signatories and has therefore not yet entered into force. The most relevant regulations in force today are the UN Basel Convention regarding transboundary transport of hazardous waste, including its Ban Amendment, as well as the EU Ship Recycling Regulation and the EU Waste Shipment Regulation. The latter can be seen as the Basel Convention incorporated into EU / European Economic Area law. In light of recent regulatory developments and stricter enforcement of national maritime laws, shipowners feel compelled to make informed decisions regarding recycling. Consequently, they must now consider several factors other than just the sale price. Ignoring these factors can give rise to significant risks. Inadequate ship recycling strategies and practices can lead to criminal liabilities, reputational damage, loss of investors and reduced access to finance.
DNV: Which stakeholders in the maritime industry show a particular interest in ship recycling within ESG reporting and why?
Jannicke Eide-Fredriksen: Stakeholders in the industry are becoming more aware of the challenges arising from the present regulatory situation. Stakeholders include not only shipowners and operators, but also other global players, such as cargo owners, insurers, finance institutions, the media and the public at large. Over the last few years, some institutional investors have been blacklisting certain companies due to their recycling practices. Some banks are using criteria such as the Responsible Ship Recycling Standards and lately also the Poseidon Principles, a global framework for responsible ship finance, when evaluating borrowers. We have also seen an intensifying public debate regarding recycling practices, and a growing relevance of business interests, for instance in connection with the Ship Recycling Transparency Initiative (SRTI) and the Clean Cargo Group. It is assumed that cargo owners working towards more sustainable production do not want to be associated with non-sustainable ship recycling practices. It is expected that some cargo owners may demand transparency from their carriers, which is not unreasonable to ask.
DNV: How can shipping companies make sure that their ship recycling processes are ESG- compliant?
Jannicke Eide-Fredriksen: Although significant improvements have been made over the last few years, strict due diligence should still be exercised when selecting yards by making sure they hold Statements of Compliance with the HKC or certificates for the EU Ship Recycling Regulation. Today, ship recycling facilities operate with a variety of standards, both between and within countries. This has to do with the way national law is implemented and enforced. In these regulatory systems, assurance products such as Statements of Compliance from the HKC have been issued by independent assurance providers contracted to the yards. The HKC Statement of Compliance products are not based on legal rights or obligations under the convention (as it is yet to enter into force), but rather on a service provided by some stakeholders. The recycling process is a series of steps from arrival to completion, each with its own critical tasks and procedures with a high risk of serious accidents and environmental impact at every stage. A shipowner should, before selling a ship for recycling, assess the yard in order to verify that it operates in a safe and environmentally sustainable manner, so as to ensure that their reputation is not at risk. A shipowner may conduct the assessment with their own resources or employ the services of a third party to carry out the assessment. On-site supervision by the shipowner or an independent third party during the recycling process may add additional advantages.
64 | The Report • June 2023 • Issue 104
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