Green Shipping In Conflict: The Clash of ESG, Venture Capital, and Red Sea Attacks

The IMO and industry leaders have voiced outrage and concern following the reported sinking of the M/V Tutor and the deaths of seafarers. Meanwhile, they are pushing stricter carbon regulations while deepening relationships with Iran’s number one trading partner, China. Is war and ESG compatible or is the shipping industry playing the fiddle as Rome burns?

by Captain John Konrad (gCaptain OpEd) For over a decade, gCaptain has championed a cleaner, more responsible maritime industry. Rooted in Silicon Valley, we’ve fervently supported startups tackling our biggest challenges. Today, environmental responsibility permeates the industry. Although maritime startups remain underfunded, they are finally gaining traction with private equity and venture capital. As an environmentalist, I should be thrilled by these developments, especially with Bill Gates spearheading new plans for the electrification of shipping. Yet, I am deeply worried.

As the first digital-only publication to reach a global audience, I have urged executives for decades to embrace new ideas and technologies.

“Approximately 90% of the world’s goods travel by sea, emitting over a billion tons of CO2 every year,” said Gates in a video posted to LinkedIn. “That’s why I’m so excited about Fleetzero’s breakthrough battery technology, which will help decarbonize ocean freight at an affordable cost and accelerated pace.”

While I appreciate Bill Gates’ entry into shipping, as an environmentalist, I believe his approach is flawed not just because electrifying ships would require mining massive amounts of rare earth material and copper but because the underlying ESG premise is flawed.

Ships are ten times more efficient than trucks and a hundred times more than planes. To decarbonize effectively, we must shift more than 90% of cargo onto the water. This requires more vessels consuming more energy, not less. Faster ships that compete with planes and numerous feeder vessels moving cargo inland are key. The latter can be hybrid-electric, but the former necessitates diesel or nuclear power.

The priority should not be the type of fuel but downshifting freight from the least efficient means (planes) to the most efficient (watercraft). Fast fashion and direct-from-China sales have caused air freight to boom, resulting in enormous social and environmental costs. Simple regulatory solutions, like removing the De minimis exemptions on air imports, could be enacted. However, international trade regulators focus on decarbonizing shipping, which increases transportation costs making ships less competitive, not more.

Shipping companies are doing their part by building enormous ships to move goods efficiently but at the cost of speed. There’s a significant gap between the weeks it takes a ship to travel from China to the United States or Europe and the days it takes by air. Smaller, faster ships could profit from time arbitrage, but new regulations prevent burning the amount of additional fuel necessary to sail fast.

Let’s do the math: ships are at least 100 times more carbon-efficient than planes. We can’t compete with the most time-sensitive cargo, but if we could reduce transit times by half, we could significantly reduce the amount of global air cargo. We must first recognize that a ship that burns four times as much fuel is still 25 times more efficient per ton-mile than airplanes.

Electric should come after the freight is downshifted. Doing it before risks freight brokers upshifting to avoid higher costs and unproven technologies.

Nuclear energy is technology that could speed up large ships without producing carbon emissions. Small Modular Nuclear Reactors, paired with batteries, could meet horsepower requirements. However, this is currently unattainable as the International Maritime Organization (IMO) and the European Union (EU) are more focused on adding regulatory burdens than reducing them. For nuclear energy to become a viable option, regulations need to be eased, not tightened.

Instead of new regulatory penalties IMO, US, US Maritime Administration (MARAD), and industry groups should push more cargo onto the water. This involves easing regulatory burdens for certain ships and subsidizing some faster but less efficient ones. Instead, organizations like the IMO and EU are making shipping more expensive, especially in the tanker market, where regulatory uncertainty has led to the lowest order book in decades.

The Environmental, Social, and Governance (ESG) criteria are not the only factors hindering carbon reduction; social factors also play a significant role

Theodore Roosevelt’s ESG Legacy

In June 2020, the Museum of Natural History removed Theodore Roosevelt’s statue, citing colonialism and racism. Considering the pivotal role he played in the Spanish-American War and subsequent atrocities committed by US troops in the Philippines, not to mention his policies toward Native Americans, there should be no surprise that he is a controversial figure. I cannot defend these actions, just as I cannot defend many of the military decisions my nation has made this century. However, despite being distasteful to a progressive worldview, I can’t think of another man in history who has banked more carbon credits than Teddy.

Few environmentalists will defend Roosevelt, but most at least acknowledge his contribution to protecting wilderness and creating the national parks. The impact of his love for nature, however, has been understated and is not even the most important contribution he made to reducing global carbon levels.

One of the biggest reasons the shipping industry is embracing carbon reduction via enormous ships and expensive alternative fuels is that these both provide an enormous moat for the largest shipping companies in the world. Yes, mega-ships are efficient, but they also heavily favor existing companies because new entrants can not afford to build a 26,000 TEU containership, and yes, green methane corridors are promising, but very few new entrants can make deals directly with ports or build fleets of new methane ships. These practices are not just aimed at improving the environment but also serve to further entrench enormous corporations. Roosevelt recognized the danger of monopolies and cartels to the environment and worked hard to bust trusts that controlled production and the narratives surrounding them.

How many metric tons of carbon did busting trusts like Standard Oil save the environment? It’s impossible to say, but another accomplishment of Roosevelt is calculable. Since its opening in 1914, over one million ships have transited the Panama Canal. One million ships that would have rounded South America, or worse, the cargo would have been put on trains, which have between 1/4 to 1/10 the efficiency of ships (depending on the route).

It’s true that Ferdinand de Lesseps’ Suez Canal has resulted in significantly more carbon savings than Panama, but de Lesseps did not break up polluting monopolies or enshrine national parks. Considering that de Lesseps did the initial construction of the Panama Canal and should share some of the carbon credits with Roosevelt, it’s debatable who had the biggest impact. Debatable until you understand Roosevelt’s greatest contribution to the world: a global US Navy. Americans are enamored by their Generals, but land wars—which have been the United States and NATO’s overwhelming focus this century—come with enormous civilian costs. From death to the destruction of homes and the displacement of enormous amounts of refugees, General MacArthur was correct in asking the United Nations to outlaw land war.

Naval battles—unless providing direct support to the army and marines—predominantly occur far from population centers, so their direct impact on civilians is minimal. The civilian impact of blockades can be massive, but as building of the Gaza Pier while supplying arms to the Israeli army—or the refusal of the West to supply weapons that will target the Kerch Bridge and shut down access to Russia’s vast inland rivers—shows blockades are avoided by modern military planners. Even during World War 2, the United States shipped more pounds of aid per person to Italy after its fall than pounds of supplies to each of MacArthur’s troops fighting in the Pacific at the same time.

Related Book: The Second Most Powerful Man in the World: The Life of Admiral William D. Leahy

History also forgets that invading Japan or dropping nuclear bombs were not the only two ways Truman could have ended the war. Admiral Leahy, Chairman of the Joint Chiefs of Staff, advocated for a third option, the total blockade of Japanese-held islands. This could have worked but was scrapped by Truman when he considered the human death toll of starvation.

Without blockades, naval warfare is far more humane and effective for global security than land wars or Air Force bombing campaigns, yet both the US Navy and NATO nations have let their Navies atrophy. Even the mighty seapower nation UK now has far more people in Army uniforms than Navy. This is an epic tragedy.

The Greatest Invention In Human History

In his book The Box, author Marc Levison points out that no invention in human history has pulled more people out of poverty than the shipping container. What most historians forget, and Levison only briefly mentions, is that containers were used over one hundred years before on canals in the UK and CONEX boxes were used extensively in World War 2. What forced a reluctant maritime industry to adopt the shipping container was proof of scale. According to Dr Sal Mercogliano’s book on sealift during the Vietnam War, enormous amounts of port congestion prevented supplies from reaching American troops, so the Army took Malcom McLean’s advice and built enormous container terminals in Vietnam and California. It was the most expensive military construction project to date, but this proof of scale showed the effectiveness of moving large numbers of boxes via ship.

Shipping companies around the world noticed the Army’s success at scale and followed.

Most ESG executives, particularly in Europe, view military cooperation as antithetical. However, history proves this bias can be dangerous.

The invention was not the shipping container itself but one shipping company’s willingness to work with and advise the US Military. Roosevelt had little to do with the shipping container—which has resulted in massive improvements to social conditions while moving more cargo from land transport to ships—but it was his relationship with and encouragement of Alfred Thayer Mahan that showed the world the importance of maritime trade to global wellbeing. Without Roosevelt and Mahan’s insistence that militaries work with and protect merchant ships, the container revolution would not have been possible.

Related Book: The Neptune Factor: Alfred Thayer Mahan and the Concept of Sea Power by Nicholas A. Lambert and James G. Stavridis

The largest contribution historians could attribute to Roosevelt in terms of carbon credits is not the national parks, the Panama Canal, or military-civil cooperation, but the Navy itself. A Navy dedicated to protecting free and open seas.

Environmental Self Flagellation Is Counterproductive

Today’s maritime industry leaders often self-flagellate over the total carbon that the over 50,000 merchant ships in the world emit. If only we could reduce the carbon emissions of all of them a few percentage points, then the overall impact would be huge. What few leaders today do is congratulate the industry for significantly reducing oil pollution incidents this century enabling an enormous reduction in global hunger and poverty.

We should not be keelhauling ourselves for falling behind schedule on overly ambitious zero emissions goals. We should be showing an army-focused NATO and airplane and truck-tolerant citizens the incredible benefits of an expanded maritime transportation system. The truth is our industry—and the ports, canals, and systems that support it—have contributed more than any other to ESG objectives. The maritime transportation system should be protected and greatly expanded not regulated into strict ESG compliance.

But free trade on free and open oceans is only possible with strong naval protection. This is a point today’s shipping leaders never mention.

Ship Sanctions Are not Working

Most industry and national leaders praise sanctions but know deep down that sanctions without naval backing are ineffective.

Free trade and reduced carbon emissions can not win until we recognize that Putin traveled to China and asked Xi’s permission to invade Ukraine in 2022, China is the number one trading partner of Iran who is supplying the Houthis, China is violating UCLOS every single day in the South China Seas and is using the drydocks the shipping industry paid for to build the largest Navy in the world. Shipping companies are reluctant to arm ships and work with any Navy but China has militarized its seafarers.

This is my final frustration. Zero emission targets and IMO efficiency regulations are meaningless without free and open seas. They are meaningless and counterproductive if ships must reroute around Africa. They are a waste without UNCLOS and the rule of law.

ESG is providing a smokescreen for coercive Chinese efforts but the most troubling factor is – while America’s naval shipyards fail to get low-cost financing because they don’t meet ESG targets – entrenched components of the global maritime industry are, and likely will, continue to profit greatly from the increasing geopolitical chaos. Last year containerships were doomed to bleed red ink because of overbuilding in low-cost Chinese yards but today they are making large Profits thanks to the Red Sea diversions. Hidden Chinese subsidies in ports, repair yards, information systems and export incentives are reducing the cost to shipowners.

As an environmentalist what worries me most is the fractionalization of global markets and the weakening of Mahan and Roosevlet’s dream for freedom of navigation. A dream that has reduced global carbon while lifting billions of people out of poverty. A dream that encompasses many core ESG principles and has been realized by the efforts of this industry over the past few decades – a job we as an industry should be immensely proud of – but a dream that’s only possible if it’s backed by naval might. A dream that can only be continued by building more allied warships and forging alliances against UNCLOS violators and nations that support state actors that have enabled the deaths of seafarers in the Black and Red Seas.

Also concerning is the shipping industry leaders and the IMO are calling for immediate action to stop the Houthi attacks but none are willing to admit that immediate and effective action requires escalating armed conflict. Are ignorant of the fact that terrorists will die if they get the action they seek, or do they acknowledge this but refrain from saying it because advocating for war is not ESG-compliant?

Four mariners dead. Two commercial ships sunk. One ship and 25 mariners held captive.  Global supply chains distorted. Where is a strong military response to this high seas threat? https://t.co/ScFyxxt3pk

— Admiral James Stavridis, USN, Ret. (@stavridisj) June 20, 2024

Either war we need full transparency and honesty about actions from industry, not just regarding Houthi action, but these terrorist relationships with Iran, Russia and China. The problem is China is a word nobody in this industry is willing to utter in a negative context regardless of the facts.

Charting A New Course

As we sail forward into uncharted waters, it’s imperative to remember the lessons of the past while embracing the innovations of the future. The maritime industry, the backbone of global trade, stands at a crossroads. We have the potential to revolutionize shipping with new technologies, yet we must tread carefully to avoid pitfalls that could undermine our progress.

Bill Gates’ enthusiasm for electrification highlights a significant shift in how we view maritime sustainability. Yet, his vision, while well-intentioned, risks overlooking the foundational strengths of our industry. Ships, by their very nature, are paragons of efficiency. The push to electrify should not eclipse the more immediate and impactful strategy of optimizing our existing fleets and infrastructure. This means shifting more cargo from air to sea, leveraging the inherent efficiencies of maritime transport.

Roosevelt’s legacy offers a poignant reminder. He has been vilified by many of ESG’s strongest proponents yet can we afford to throw out the baby with the bathwater? His errors were grave but his environmental ethos, combined with a fierce dedication to breaking up monopolies and fostering a robust navy to protect world trade, is the foundation of global shipping today. The Panama Canal, a testament to strategic foresight, dramatically cut transit times and carbon emissions, proving the power of visionary infrastructure.

Today, we face a new set of challenges. International regulations, while essential for standardization and safety, sometimes stymie innovation and efficiency. The maritime industry’s ability to adapt and thrive depends not just on technological advancements but on regulatory frameworks that encourage growth and innovation.

The call to action is clear. We need more than electric ships and stringent regulations. We need a comprehensive approach that includes hybrid solutions, regulatory flexibility, and above all, a strong naval presence to ensure the free and open seas that are vital for global trade. This approach must be supported by robust alliances and strategic investments in maritime infrastructure and security.

Is this even possible considering the windfall profits shipping companies have received as a result of war on the Black and Red Seas… and by tightening cooperation with China.

Our industry has achieved remarkable feats. From reducing oil spills to enhancing global connectivity, we have much to be proud of. However, resting on our laurels is not an option. The threats of geopolitical instability, protectionism, and fractured global markets loom large. We must champion a united front, advocating for policies that promote maritime efficiency while safeguarding the environment.

In conclusion, the maritime industry stands as a beacon of progress, capable of leading the charge towards a sustainable future. Yet, this future hinges on our ability to balance innovation with practicality, regulation with freedom, and environmental stewardship with economic viability. As shipping executives, admirals, and government leaders, it is our duty to forge a path that honors the legacy of the past while boldly navigating the complexities of the present. Together, we can ensure that the seas remain a domain of opportunity, resilience, and boundless potential.

We can achieve zero emissions, and Bill Gates’ efforts can certainly contribute to this goal. However, this is only possible if we strengthen the foundational structures of our free trade system. We have an abundance of money, talent, opportunity, and technology, but the most critical factor is time. An immediate sense of urgency is required as the foundation is rapidly eroding.

Naval leaders need to adapt as well. It should be recognized that US shipyards are struggling and new warship production is delayed due to a lack of ESG financing. Meanwhile, Chinese shipyards are benefiting, and the cartels that work closest with China are profiting. These leaders should approach this issue with the urgency that is currently absent in the Pentagon. They should sign onto the Secretary of the Navy’s Maritime Statecraft Initiative, to bring allies closer together and read Captain Brent Sadler’s work on Naval Diplomacy. More importantly, they must understand the need to justify increased naval spending, a critical element that both Roosevelt and Mahan stressed repeatedly. This can be accomplished by clearly telling the maritime industry, government leaders, and citizens the true stakes involved.

ESG confidently assures a just and balanced future, where shipping holds a crucial position. Yet, it’s essential to remember that no passenger is safe aboard a ship that’s sinking from a Houthi missile, Russian mine or Chinese Coast Guard water-cannons.