How to ensure ESG-compliant ship recycling

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.

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.

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.

DNV has created a guidance paper to support shipowners’ recycling decisions, in particular for yards that are not featured on the European list. We cannot see that any of the present assurance services in the market can replace a proper, individual case-by-case assessment of yards that are not on the European list. The HKC has not entered into force, and the Statement of Compliance is not anchored in national law. Shipowners should be aware of two areas in particular. The first is related to scope. Although the HKC requires authorization of the downstream waste management facilities by national authorities, there is no assessment of their actual operation. This might be satisfactory from a strict regulatory perspective. However, if a wider CSR and ESG perspective is taken, it might merit a more coherent discussion. The second is related to the verification methodology of the ship recycling facilities. To our knowledge, there are no defined, established or internationally accepted certification schemes in place. There are also no clearly defined, transparent and available methodologies for the verification itself, whether it’s a document review or a site inspection. Furthermore, there are no consistent, transparent requirements for the adherence to the resulting Statement of Compliance during its validity period. So, the standards of the certified recycling facilities can still vary quite significantly.

DNV offers consultancy services to shipowners for evaluating ship recycling yards to make sure acceptable standards are met. DNV may assist in the evaluation of the ship recycling facility plan, the ship recycling plan and other relevant documentation. DNV can also be a consulting partner for shipowners seeking to avoid possible pitfalls, based on our experience with evaluating ship recycling applications in connection with the EU list.

Ship recycling is an industry which touches on all aspects of ESG. On the environmental side, this includes the possible negative impacts of ship recycling. The vast majority of commercial ships are demolished on mudflats or by the landing method. The reporting should cover the mitigating actions taken to avoid or significantly reduce the negative environmental impact of ship recycling, such as collecting hazardous liquids, handling spills, collecting slag from flame-cutting, avoiding chemical contamination from anti-fouling compounds, and avoiding the transfer of invasive species through ballast water or biofouling. From an ESG perspective, specific considerations must be made regarding the adequacy of the downstream waste management facilities.

On the social side, the main concern is worker health and safety, particularly the industry’s high accident and fatality rates. Reporting should cover health and safety practices related to ship recycling. Shipowners should be aware that many recycling countries have only partially implemented International Labour Organization (ILO) conventions and that workers’ rights are not necessarily adhered to. From an ESG perspective, minimum wage, working hours, overtime payment, injury insurance and housing/dormitory standards must be considered. With regards to governance, shipowners should consider that the countries recycling their ships may have different levels of corruption and transparency compared to where they primarily operate. It is important that shipowners identify such differences and take suitable mitigating actions in line with corporate policy and the interests of their stakeholders and the global community.