Blue Finance Solutions for Sustainable Ship Recycling

#BlueFinance is an emerging area of climate finance characterized by investments dedicated to financing activities that contribute to the protection and preservation of oceans, coastal and marine ecosystems, as well as clean water resources and infrastructure. Blue finance has seen a surge of interest from investors, financial institutions and issuers globally, and is expected to continue to grow as demand increases and as the risks and opportunities come into greater focus. ?In this series on blue finance, we aim to highlight some of the trends and innovations in this expanding and critical market.

Our first piece focuses on sustainable ship recycling and the standards and regulations that could drive more environmentally friendly and economically sound ways of disposing of end-of-life commercial ships.

By Pushkala Ratan , Kaushi Liyanage , and José Gamito Pires

Around 90% of all goods in the world are shipped across the oceans. Of these goods, 60% are packed in large steel containers. The rest, mainly commodities like oil or grains, are transported directly in bunkers or tankers. Due to safety and environmental regulations, as well as the harsh operating environment, the lifespan of a cargo ship is typically 25 years. Even if cargo vessels were well maintained and could extend their lifespan to over 100 years, it would be better both economically and environmentally to recycle ships sustainably and build new ones that reduce CO2 emissions and improve efficiency.??

Currently, 90% of global ship recycling capacity by tonnage is concentrated in five emerging economies: India, Pakistan, Bangladesh, China, and Turkey.

Source: Ship recycling in developing economies of South Asia: Changing liability to a commodity - ScienceDirect

Despite its profitability and income generation, poor working practices and low environmental standards tarnish the image of the ship recycling sector at national and international levels. Numerous accidents and fatalities highlight the lack of adequate Occupational Health and Safety (OHS) standards. Seasonal migrant workers, many unfamiliar with industrial settings, represent the majority of workers in ship recycling yards.

The steel industry is one of the top three producers of CO2 in the world. Ship recycling supplies a large quantity of scrap metal to the steel and iron industries, reducing the need to produce virgin metals to meet demand. About 60% of Bangladesh's total steel demand is met through ship recycling.

While most ships are built in developed countries, they are sold for recycling in emerging economies at the end of their lifespan. This is primarily due to low labor costs and the ability to employ large workforces. Additionally, South Asian shipyards can handle large vessels that European facilities cannot accommodate. Ship recycling creates opportunities in emerging economies by providing jobs to those who need them most. However, unsustainable practices put these revenues at risk, along with the opportunity to meet steel demand. According to the NGO Shipbreaking Platform, 446 ocean-going commercial ships and offshore units were scrapped in 2023. The vast majority—325 ships—were dismantled on beaches in Bangladesh, India, or Pakistan.

Source: Ship recycling in developing economies of South Asia: Changing liability to a commodity - ScienceDirect

Ship Recycling Lab

Last month, the Ship Recycling Lab gathered key stakeholders in Lisbon. Representatives from emerging economies including India, Pakistan, Bangladesh, Turkey, and Brazil attended this event, alongside participants from Norway (a leading maritime nation), Netherlands and Singapore (main shipping hubs), and Germany (main producer of cutting technologies).?

The event revealed that ship recycling extends beyond basic dismantling. Norway leads the field with ship upcycling, using unique methods that allow for careful steel removal and direct distribution to buyers without unnecessary processing stages. Some shipping companies, such as Hapag-Lloyd, are recycling their vessels under strict EU environmental standards, reflagging them when necessary. Ships contain numerous pollutants that must be properly contained to prevent ocean and water contamination. Despite growing pressure on ship owners to order new, greener vessels and help decarbonize global trade, the global shipping fleet has reached its highest average age—13.7 years—in the last decade.

Over one-third of the global shipping fleet carries fossil fuels as cargo. Shipowners and financiers must find ways to dispose of or repurpose these assets in line with low-carbon goals. Following the highest standards for recycling ships and offshore platforms will protect human lives, economies, biodiversity, and the environment. Financial institutions can influence responsible practices of ship owners. For example, the Responsible Ship Recycling Standards (RSRS) founded in 2017 are voluntary principles for financial institutions active in ship financing. 12 banks, together representing major European ship financiers, have committed to integrating RSRS into their environmental, social, and governance (ESG) policies and lending practices and to engage with their clients in their efforts to improve recycling practices. In 2019, the Poseidon Principles Association established a framework for assessing and disclosing the climate alignment of ship finance portfolios. Now with 35 financial institution signatories representing over 80% of the global ship finance portfolio, the Association has built on this foundation and established the Future Principles Committee to address emerging ESG issues such as ship recycling, crew safety, gender equality, and biodiversity.

At the meeting, IFC presented blue bonds/loans as innovative financial instruments for eligible blue finance activities. Sustainable shipping is one of the categories featured in the blue finance guidelines: this could include investments in oil spill prevention, risk safeguards, and recovery facilities. Certifications and independent verifications of sustainable ship recycling facilities can help build investor and issuer confidence in these historically overlooked activities. Projects must align with water/ocean-related sustainable development goals (SDG 6 and 14) without introducing material risks to other areas and clearly state which internationally accepted sustainability standards they follow. Looking ahead, financing innovative sustainable ship recycling projects could contribute to the acceleration of decarbonization, of both the shipping and steel industries, while improving working conditions and offering additional protection to the marine ecosystem.