FCEM - Shipping Finance

The decarbonization of the global shipping industry is one of the most pressing challenges in maritime transport, with significant implications for the financial performance and valuation of shipping companies. The International Maritime Organization (IMO) has set ambitious climate targets, including a 40% reduction in carbon intensity by 2030, and net-zero greenhouse gas emissions by or around 2050 (IMO, 2023). These regulatory shifts elevate carbon risk –the financial exposure to transition-related costs, technological demands, and policy compliance– as a core element of shipping firms' risk profiles. The impact is especially pronounced for publicly listed shipping firms, whose stock valuations increasingly reflect asymmetric exposure to environmental regulations, decarbonization capabilities, and ESG-sensitive investors' behavior.
Recent evidence in the asset pricing literature suggests that investors increasingly recognize and respond to carbon emission risk, with several studies indicating that such risks are priced by participants in financial markets. Bolton and Kacperczyk (2021) provide direct evidence of a "carbon premium" in U.S. equity markets, showing that firms with higher carbon emissions tend to have higher stock returns-after controlling for size, book-to-market, and other standard risk factors-consistent with investors demanding compensation for carbon-related exposures. Ilhan, Sautner, and Vilkov (2021) complement this by demonstrating that firms with higher emissions face greater downside risk, as reflected in the pricing of out-of-the-money put options, implying that investors hedge against adverse climate news. Engle et al. (2020) show that stock returns systematically respond to climate change news and that portfolios can be constructed to hedge this risk. In contrast, Pástor, et al. (2022) argue that the recent outperformance of green stocks is largely driven by shifts in investor preferences rather than risk-based compensation, suggesting that non-financial motives may also influence the pricing of carbon risk.
While the asset pricing literature has advanced our understanding of how carbon risk is incorporated into equity valuations, it remains unclear whether these mechanisms extend to sectors that are structurally distinct, globally regulated, and highly carbon intensive, such as maritime shipping. The shipping industry contributes nearly 3% of global greenhouse gas emissions and is subject to increasingly stringent environmental mandates under the International Maritime Organization's decarbonization strategy (IMO, 2023). Unlike most industries, shipping is highly capital-intensive, extremely sensitive to macroeconomic and commodity cycles, and exposed to unique operational and regulatory risks that shape its risk-return profile (Alizadeh and Nomikos, 2007; Drobetz et al., 2016; Pouliasis et al., 2018). Firm-level heterogeneity in fleet characteristics, such as vessel age, flag, size, engine type, fleet diversification, and the adoption of emission-reducing technologies, results in significant differences in carbon emissions across shipping companies, which may affect how investors perceive and price firms' exposure to carbon-related transition risks (Bouman et al., 2017; Brynolf et al., 2014). Alongside these developments, the growing prominence of ESG-oriented investing, particularly among institutional investors, has intensified the scrutiny of carbon-intensive firms, as investors increasingly demand transparency in emissions and integrate climate considerations into capital allocation decisions (Flammer, 2021; Liang and Renneboog, 2017). Despite these developments, little is known about whether firm-level carbon risk is priced in the cross-section of shipping equity returns. This study addresses this gap by investigating whether carbon risk is reflected in the cross-section of shipping stock returns, thereby contributing to both the sustainable finance literature and the emerging body of research on shipping asset pricing.
To investigate the pricing of carbon risk in shipping equity markets, we construct a sample of internationally listed ship-owning and operating firms through a rigorous and transparent screening process, ensuring that the selected companies are primarily engaged in maritime transport and, therefore, substantially exposed to carbon-intensive operations in a highly capital-intensive industry. Our empirical strategy combines portfolio analysis to evaluate return differentials across carbon emission risk-based portfolios with Fama-MacBeth's (1973) cross-sectional regressions to formally test whether carbon emission risk affects shipping stock returns. This approach extends recent advancements in carbon risk pricing by tailoring them to the unique operational and regulatory characteristics of the international shipping industry.
Although the existing academic literature (Bolton and Kacperczyk, 2021; Aswani et al., 2024; Oestreich and Tsiakas, 2015; Matsumura et al., 2014) presents mixed findings on the relationship between carbon emissions risk and stock returns, we expect a positive relationship in the case of shipping stocks. This expectation is based on the industry's inherently high carbon intensity and its increasing exposure to stricter environmental regulations, such as the IMO's decarbonization targets and carbon pricing mechanisms (e.g., emissions trading systems and carbon taxes). As compliance costs rise and transition risks intensify, investors are likely to demand higher risk premiums for holding carbon-intensive shipping stocks, resulting in higher expected returns. Moreover, the magnitude of this carbon risk premium is likely to vary with firm-specific characteristics, including financial constraints, fleet composition, corporate diversification, and strategic orientation toward environmental sustainability, all of which are empirically examined in this study. These findings are particularly important for understanding how environmental risks are priced in the traditionally carbon-intensive sector. By uncovering the relationship and conditions under which carbon risk is priced in shipping equities, this study not only advances the literature on climate finance but also offers relevant insights for investors allocating capital and for shipping firms designing carbon mitigation strategies in response to evolving market expectations.

This paper investigates how maritime shipping companies adjust their capital structures – debt-to- equity (D/E) ratios – in response to market volatility and financial risks for the time period 2019-2024. The research focuses on the tanker and specialized gas carrier (LPG and LNG) segments due to their high exposure and sensitivity to regulatory shifts , the Covid-19 pandemic, geopolitical issues that have a direct effect on freight rates and global trade patterns. The maritime shipping industry is characterized by its capital intensive and cyclical nature therefore maintaining financial stability is a unique challenge for companies to navigate. Initially analyzing six publicly traded companies-two diversified, two tanker-focused, and two gas carrier-focused-the study employs both quantitative data from SEC filings and qualitative insights from industry reports. For the final publication, the scope will expand to 130 companies, incorporating an econometric time series analysis to examine the relationship between leverage and freight market fluctuations. Our preliminary findings reveal that companies in the tanker segment tend to maintain a more flexible leverage strategy, while companies in the specialized cargo and gas carrier segments maintain a higher leverage which can be attributed to long-term time charter agreements and less reliance on the spot market. Companies with a diversified fleet exhibit a mixed pattern regarding their capital structure depending on their fleet composition. The results indicate that capital structure theories such as the Trade-Off Theory, Pecking Order Theory and Market Timing Theory, only partially explain the financial strategies employed by shipping companies, further highlighting the need for tailored financial risk management strategies. 

This study examines whether and to what extent shipping companies were affected by the impacts of COVID-19 and the Russia-Ukraine war crises. We hypothesize that shipping companies are more likely to adopt more complex, sophisticated, detailed, and extensive management accounting systems due to the crises during the period under review (2019-2024). The study is informed by the answers of the executives of 713 shipping companies to an online structured questionnaire. Empirical evidence indicates that both crises impact the shipping industry, with COVID-19 being more influential. The results also verify that, under the pressure and consequences of the crises, entities developed, improved, and incorporated more complex and sophisticated methods and tools into their systems to overcome the challenges. At a second level of analysis, the results record the level of assimilation of each pillar of management accounting systems to shipping companies. The results of our study are essential for both shipping executives and academics. They shed light on how shipping markets react to periods of crisis. In parallel, contribute to the management accounting systems and international shipping literature by providing information on the level of their integration in the highly complex and volatile shipping industry. The analysis of shipping executives' perceptions is significant because it allows for a deeper understanding of the crisis's impact. Management accounting systems studies have focused on several industries, but empirical evidence in the shipping sector is lacking.

The paper discusses proactively managed real options under geometric mean reversion stochastics. The paper develops further the proactively managed real options theory that suggests that under dynamics with high uncertainty it may be optimal to act earlier rather than later, i.e., it contrasts the prediction of the traditional real options literature. The paper adds to the theory by studying the effect of mean reversion for geometric stochastics. The paper also adds to the literature by introducing the strategy of proactivity by "warm stacking" during inactivity. The theory is illustrated by cases from ocean industries. The maritime green transition often involves entry and exit decisions with substantial switching costs under high uncertainty. To proactively manage these switching costs by proactive investments in flexibility may facilitate a more cost-efficient green transition of the maritime industry. The paper presents an illustrative case of proactive investments to facilitate switching of between fossil and zero-emission fuels.

In this paper, we investigate how to successfully forecast the direction of an economic time series. Our study is performed by means of Monte Carlo simulations where the simulated data generating processes (DGP) are chosen based on estimates from freight rate agreement (FFA) data. The situation we have in mind is when a forecast should be used for a particular decision, e.g. should we go long or short in a financial asset, enter an interest rate swap or whether we should commence with a costly project or not. We show that there are situations where the benefit of correctly specifying a model has the cost of producing inferior forecasts for the future direction of the time series compared to reducing the data to an indicator variable before predicting it. In any of the cases we study, including the one with parameter values closest to a real world example from shipping, a very simple model where data is reduced from a price change to an indicator before the model is fitted, turns out to outperform a correctly specified model.