MPC Capital’s Constantin Baack on decarbonizing the shipping industry

Of course, Kie, and thanks for having me. Looking forward to our discussion today. My name is Constantin Baack, I'm CEO of MPC Capital. We are stock listed in Frankfurt, an investment and asset manager. I have been with the group for the last, better half of 17 years. In my capacity as CEO, I'm overseeing the overall strategy, M&A, and I'm also overseeing all our maritime activities as part of the management board. We have around 280 people in 10 different offices, a main office in Hamburg, Germany, but we also have offices in Asia and also the Americas. And I'm looking forward to our discussion on the maritime space today.

There are quite a few, to be frank. I mean, first of all, when you look at the trends, and certainly most recent trends, there has been an increasing regulatory pressure in terms of the IMO goals, the IMO being the International Maritime Organization, in terms of reduction of greenhouse gases. There is another regulation called Fuel EU Maritime, which also stipulates certain constraints on the fuels that you burn and certain rules and regulations. And most recently also the ETS, yes, so the trading system, carbon emission trading system, has been applied to the maritime industry. So a lot of things are happening which levy additional costs if you're not compliant and certainly if the emissions go up. So more and more regulation is hitting the maritime space, which is a new trend. Secondly, obviously technological innovation is another aspect to look out for. Items like energy efficiency devices, ship designs, retrofits, new fuels, new technology. Ships used to run on fossil fuels, so now we have ships that can run on green methanol, that can run on certain gas. So a lot is happening in the space. Alternative fuels being another trend. Increasing focus on cleaner fuels in hand with some of the regulation. And very importantly also the demand for more transparency, and that is obviously working somewhat hand in glove with a lot of the ESG focus in terms of regulation, in terms of reporting, in terms of transparency. So a lot of things are happening when you look at the trends. And last but certainly not least, items like green financing, sustainability-linked financing, so a lot of things that also have an impact on the way assets are financed are being more and more prominently present in the maritime space. So those are the trends.

If you then look at the challenges, we have challenges related to high cost. So yard prices, meaning prices for new ships, have increased significantly over the years, not least because of inflation but also because of higher specific technical specifications of the ships. Meaning you're now having, and I mentioned it earlier, not just ships that run on fossil fuels but you have so-called dual fuel concepts on board of ships. That means the main engine can burn different fuel types. Another challenge is the fuel uncertainty. Over the last decades it was clear you can buy and bunker fossil fuel all over the world, and there's a high uncertainty around what is the future fuel that reduces carbon emissions. A lot of uncertainty around that aspect. Regulatory ambiguity another aspect. So whilst the EU is somewhat front runner in terms of new rules and regulation, they are partly regional and not global. And last but not least, when I look at challenges, I would name infrastructure limitations, meaning a global lack of infrastructure for alternative fuels, meaning bunker infrastructure, or other major barriers to expanding and to actually facilitating a green transition when it comes to shipping. So a lot of trends, a lot of challenges that we can dig into in more detail if you want.

That's quite a broad question, but let me try to start with, you know, first of all, certain trends. When you look at the institutional investor landscape, and for sure, you know, we have seen over the last years and I certainly expect that trend to continue, in terms of asset allocation, a shift more towards alternative investments. And obviously within alternatives, there is private equity, private debt, real assets for that matter, and there you would also have the shipping industry. The decarbonization of the shipping industry has two legs: one is obviously the ships, meaning the infrastructure on the water, but it's also the infrastructure that is basically on shore, and that includes production facilities for greener fuels, a bunker infrastructure which is currently basically dominated by fossil fuel bunker infrastructure, and obviously the ships on the water. And all of that is a very huge pool of investment needs. And with the need to decarbonize and the shift towards decarbonization, and certainly also the penalties that come hand in hand with that, there is a big playing field. These decarbonization efforts need to be financed, so there's a significant need of capital meeting a significant shift towards alternative investments. So there is a very attractive path for this transition. We're talking about big projects, we're talking about big volumes, high investment needs for fleet renewal, for retrofits, for infrastructure upgrades, etc. And we, as MPC Capital, are serving as a bridge for institutional capital to enter the space, for us to co-invest alongside. And that is a very important field where I see the role of institutional investors growing more and more going forward.

That's the capital side. Maybe in terms of you know green bonds and ESG integration, you have other aspects in terms of leverage. So you need the equity side, you need the credit side. There are a variety of products out there: green bonds, sustainability-linked loans, green loans. We have done a lot of these over the years and we see that trend growing. And you need institutional capital to service that. So both on the equity and credit side, there's a significant need, and we're talking about billions and billions of dollars in order to facilitate the decarbonization of the maritime industry.