The Regulatory Wave: Preparing for CSRD, EEXI, CII, and Beyond
Dozens of ships depend on the Panama Canal daily, yet with the current drought, this has been disrupted by bottlenecks and delays. It is just one example of the realities of climate change. In addition to being on the receiving end of these effects, the maritime sector is also under the microscope for its contributions to climate change, being responsible for over 80% of international trade by volume.
The ocean shipping sector also has significant potential to improve the sustainability of global supply chains. With upcoming regulations like the Corporate Sustainability Reporting Directive (CSRD), the Energy Efficiency Existing Ship Index (EEXI), and the Carbon Intensity Indicator (CII), the shipping industry can only learn to adapt, change, and move forward. Challenges like those at the Panama Canal clearly illustrate the need for this type of focused sustainability effort and accountability.
Regulators Demand Change
With the environmental changes the world is experiencing, regulators are attempting to tighten the reins on supply chain emissions. There has been an increase in regulations, which are also planned to increase in strictness, with benchmarks and timelines for adhering to them and some expanding in scope of which type and size of companies they concern. Shippers and vessel owners must be aware of the potential impacts, starting with the following three regulations.
CSRD: Ensuring Carbon Accountability
The Corporate Sustainability Reporting Directive (CSRD) is a European Union (EU) initiative that aims to increase transparency and accountability in the business realm concerning environmental, social, and governance (ESG) factors. The CSRD requires the largest companies operating within the EU to provide in-depth annual disclosures on their performance, focusing on supply chain carbon emissions and other sustainability indicators.
Previously, under the Non-Financial Reporting Directive (NFRD), sustainability reporting was limited to large entities like publicly listed companies, banks, and insurance companies—less than 12,000 companies. The CSRD is adding to the NFRD and expanding the scope of which companies it applies to—companies meeting a combination of a few criteria: more than 250 employees, €40 million in turnover, or €20 million in total assets. Almost 50,000 European companies and non-EU entities that operate in Europe will fall under the CSRD’s requirements by 2028.
Companies must begin reporting on their carbon emissions, including Scope 3 emissions that they do not directly have ownership over, for example, transportation and logistics. The focus for these companies should be on adopting quality methods of gathering data from every aspect of their supply chain.
Effectively, large companies will gradually pave the way for those not subject to the CSRD to follow in how they access their indirect supply chain emissions data. They give their suppliers, logistics partners, carriers, and others a reason to explore ways of making this type of data standardized, accessible, and easy to manage. Although it will take time to get here, they will focus on reducing emissions to benefit the environment and for smaller companies also investing in sustainability.
EEXI: Enhancing Vessel Efficiency
The Energy Efficiency Existing Ship Index (EEXI) was created to assess the efficiency of existing ships, as opposed to newly constructed vessels, based on their design parameters. EEXI requirements will push vessel owners to meet strict carbon emission constraints relative to each vessel’s cargo capacity.
From an environmental standpoint, the EEXI is a step in the right direction; however, from the charterer’s and shipper’s perspective, there is some uncertainty about the immediate effects. It’s unclear whether charterers’ uncertain outlooks into the future (not wanting to sign long-term contracts with vessel owners) will cause rates to decrease or whether other factors will be at play that lead to a different dynamic. Either way, vessel owners must move forward with any necessary retrofitting and upgrades, investing in technologies that improve their energy efficiency.
CII: Evaluating Environmental Performance
The Carbon Intensity Indicator (CII) was introduced by the International Maritime Organization (IMO) to address shipping-industry carbon emissions that are attributed specifically to the way that vessels operate. The CII assigns ships a letter rating, ranging from A to E, to reflect their annual carbon intensity in relation to a gradually reducing target set by the IMO.
A vessel’s carbon intensity is calculated by its annual fuel consumption multiplied by a carbon-emission factor specific to the fuel type used. This is then divided by the annual distance traveled multiplied by the ship’s capacity for a result in units of carbon emissions per ton-mile.
Receiving an E rating in any year or a D rating for three consecutive years means the vessel owner will need to revise the Ship Energy Efficiency Management Plan (SEEMP), committing to a corrective action plan.
There is some criticism of the CII based on one crucial point—distance is a factor such that when it increases, the carbon intensity decreases for a more favorable CII rating. This, in theory, makes it appealing to use strategies that increase a vessel’s annual distance simply to achieve a better rating rather than actually operating in an environmentally friendly way. However, the operations of vessels directly impact the Scope 3 carbon emissions of shippers. The good news is that with the demand for sustainability from shippers, vessel owners will have added pressure to operate responsibly to satisfy their customers.
Leveraging Technology for Regulatory Compliance
What can companies do to prepare for the regulations they face? This is where technology has a role in helping shippers and vessel owners access reliable, quality carbon emissions data and added tools for implementing decarbonization strategies.
Emission Monitoring and Reporting for Shippers
The foundation of any decarbonization strategy must be accurate emissions data. Carriers might eventually make carbon emissions data more readily accessible, but unfortunately, the most common methodologies are based on default data, which fall short of providing the precision and granularity required for meaningfully informing companies’ freight decisions.
Searoutes, however, takes a different approach, pulling data from diverse sources, standardizing it, and modeling it for the exact scenario, regardless of the company’s carrier. They can know the exact carbon footprint of their procurement options and can then lean on the following tools to lower their freight emissions:
- Route Optimization – By analyzing trade lanes and factoring in carbon emissions, shippers can make informed decisions, choosing how they balance speed, cost, and environmental impact.
- Planning Tools – Advanced technology can reveal the results of different scenarios, helping shippers understand the carbon impact of changes in their shipping routes or methods.
- Benchmarking –Shippers can position themselves more competitively using insights into industry standards and best practices.
Route Optimization and Data-Driven Insights for Vessel Owners
The key to optimized operations for vessel owners is data that accurately reflects their actions and improvement options. Knowing the carbon emissions on specific routes or understanding the fuel consumption in varying conditions allows operations to make decisions fully backed by data that produces verifiable results.
A significant portion of vessel operations revolve around choosing the right routes. With both goals of timely deliveries and reduced emissions, route optimization becomes critical. Platforms like Searoutes enable vessel owners to analyze:
- Route Optimization – Vessel owners can better understand the impacts of specific routes and identify their biggest opportunities for improvement, whether by optimizing fuel consumption or increasing voyage efficiency.
- Benchmarks – With benchmarking, vessel owners can ensure they are performing well in relation to other vessel operations.
- Data for Continuous Improvement – The best approach requires continuous monitoring and feedback, made possible by real-time dashboards and comprehensive reporting to keep vessel owners informed.
An Informed Approach to Regulations and Reporting
For shippers and vessel owners, Searoutes fills in the gap between a lack of direction and clarity on how to effect change. Providing granular-level data not available anywhere else in the industry plus advanced analytics, Searoutes helps companies make the best decisions for their decarbonization goals, including those for meeting regulatory requirements. Shippers and vessel owners can leverage a powerful platform and APIs to stay continuously informed with accurate and precise carbon emissions data.
To learn more about the difference Searoutes’ proprietary methodology can make for your company, reach out to book a demo with us today.