CEO's Sustainability Review

Our strong environmental, social and governance performance is evidence of successful execution of our strategies to continually reduce our environmental impact, keep our crews healthy and safe, and maintain sound controls and accountability to our stakeholders. We have the people, values, assets, business model, strategies and financial health that position us well for a sustainable future

Pacific Basin had another very good year in 2022, benefiting from a strong dry bulk market especially in the first half, while managing our way through industry-wide and global challenges and uncertainties to again deliver our Company’s strongest ever underlying results.

It was also a year in which we doubled down on our preparations and strategies for the great decarbonisation challenge, enhancing our resilience in the face of coming carbon reduction rules and the expected raft of new measures – global and regional – that will drive our industry’s transition to a low-carbon future. We welcome such further regulation where it is well conceived and effective in achieving its carbon reduction goals. It is sorely needed if our industry is to align with a 1.5°C pathway.

Progress towards our ambition of Net Zero by 2050

We target to have a fully zero-emission fleet by 2050 and so, while we are buying modern second-hand ships, we will continue not to order any newbuildings until they are zero-emission capable. We made an important step in that direction in 2022 when we commenced a collaboration with leading Japanese shipbuilding group Nihon Shipyard Co. and major trading house Mitsui & Co. to assess the suitability of alternative green fuels for our ship types.

We conclude that green methanol is currently the best fuel around which to plan our first zero-emission vessels (ZEVs) and we are now again collaborating with our partners to develop an efficient design for what we expect will be our first dual-fuel Ultramax ship able to run on either methanol or fuel oil.

We should be ready to contract our first ZEV for delivery well ahead of our original 2030 target, and we believe that our example will help accelerate the transition to zero-emission shipping in our dry bulk sector.

We have ambitions both to renew and grow our fleet in the years ahead. It is vital therefore that we collaborate with shipbuilding and other partners to ensure we develop optimally-designed first generation ZEVs and secure our access to a strong flow of zero-emission-capable Ultramax and Handysize opportunities with which to renew and grow our fleet.

We believe that ammonia will one day join methanol as an important marine fuel in some sectors once technical and safety challenges are adequately addressed, and that biofuels will also feature in the industry’s fuel mix. Biofuels are expected to be recognised by IMO as a low-carbon fuel in the future, at which point they can then be blended with fuel oil to reduce ships’ carbon emissions intensity or be used as a drop-in fuel to fully replace fuel oil.

We trialled the use of 100% biofuel in 2022, and our findings showed no adverse effects on our main and auxiliary engines, boding well for the uptake of biofuel in our fuel mix in the future.

Well prepared to comply with IMO carbon reduction rules

The first global rules to mitigate carbon emissions from existing ships came into effect on 1 January 2023, and a cross-functional effort in 2022 has ensured that our Pacific Basin ships are well prepared to comply.

Energy Efficiency Existing Ship Index (EEXI) rules require all ships to achieve a minimum energy-efficiency level through technical design enhancements. Our ships’ EEXI ratings benefit from our longstanding investments in energy-saving devices but, like most of the global dry bulk fleet, around 70 of our owned ships will also need to be fitted with engine power limiters by their first annual survey after 1 January 2023 in order to be EEXI-compliant. Arrangements have been made for all our ships to comply.

Carbon Intensity Indicator (CII) rules will require all ships to adjust the way they are operated in order to gradually reduce their emissions per unit of work done. Compliance will become increasingly difficult for conventionally-fuelled ships over the medium to long term – especially if IMO increases the annual reduction requirements from 2027 – and needs a truly cross-functional and multi-stakeholder effort to ensure existing ships are able to comply and continue to trade for the foreseeable future. Technical enhancements will help, but the main levers for managing ships’ CII ratings rest with commercial managers who decide how to deploy ships – including which cargoes/trades to perform and at what speed. Our global chartering team has developed a good understanding of the CII rules and their implications, and they are armed with our own digital tools to track our ships’ CII metrics and to calculate the effect of future deployment alternatives on our ships’ CII ratings.

New rules will increase fleet inefficiency and tighten supply

EEXI (and specifically engine power limiters) will result in a one-time permanent reduction in maximum speeds, which will limit the global fleet’s ability to speed up to meet increases in demand.

CII will result in progressively slower vessel speeds and, over time, accelerated scrapping as older and less-efficient ships become incapable of compliance.

The current CII framework is imperfect. It allows vessels’ CII ratings to be significantly impaired by factors outside vessels’ control (such as port waiting times, adverse weather, voyage distance, etc.) and, illogically, it encourages longer sailing distances – including longer empty ballast voyages – and penalises shorter sailing distances and high-utilisation trading patterns with a high laden-to-ballast ratio.

We understand the challenges of the UN and IMO’s consensus system, and we recognise that the flawed current CII framework is a compromise designed to launch carbon reduction rules without delay. However, for the above reasons, we join other voices that are calling for IMO to revise its CII framework for more logical, fair and effective carbon reduction and to align it with real-life operating conditions.

At Pacific Basin, we prioritise the use of the EEOI carbon-intensity metric which sensibly indicates CO2 emissions per tonne-mile of actual cargo transported, thus encouraging more efficient, higher-utilisation vessel deployment strategies. We consider EEOI to be a far better metric for the environment.

We hope IMO will address these points when reviewing its decarbonisation measures over the next few years, when we also hope IMO will tighten its 2050 target to align with widespread calls for Net Zero by 2050.

In December 2022, the European Union reached agreement on the main terms of shipping’s inclusion in the EU Emissions Trading System (ETS) with effect from 2024. This will be the first significant programme in which the sea transport value chain will have to pay for its carbon emissions. We have been watching the evolution of this scheme closely are well prepared for it.

While we far prefer global over regional regulations, we recognise the need for such carbon pricing scheme in order to drive carbon-intensity improvements and the transition from fossil fuels to more expensive green fuels.

IMO is now considering how it too should best approach carbon pricing, which is likely to be adopted in a couple of years and take the form of a global carbon levy collected at the fuel pump.

Regional – if not global – initiatives will continue to be rolled out in the years ahead to drive decarbonisation (including carbon-intensity reduction rules, carbon pricing and taxation, fuel standards, etc.), and the growing patchwork of different and sometimes inconsistent rules and regulations around the world are making shipping more complicated. As a large dry bulk player with comprehensive capabilities spanning technical, commercial, operational and other functions, we are well equipped to understand and navigate the complex regulatory environment.

Compliance with CII and other coming regulations will increasingly require dialogue and even collaboration with stakeholders. We want to expand our engagement with our cargo customers and tonnage providers about decarbonisation and the implications of related regulation, offering to share our knowledge and collaborate with them on initiatives to better understand and reduce our shared carbon footprint and propose strategies to ensure their trades may continue as decarbonisation rules tighten.

Enhancing our focus on our people

While greenhouse gas (GHG) reduction now appears at the top of the industry’s agenda, our first priority remains the safety, health and wellbeing of our staff. Our fleet’s safety KPIs in 2022 were slightly behind our best-ever performance figures of 2021, but are still well ahead of industry averages. Even so, our board and managers cast a critical eye over any accidents and injuries, and we continue to target zero incidents across our fleet.

In extreme weather in July 2022, our vessel Portland Bay lost power near Sydney due to engine blower failure, resulting in a near-grounding, tug support and media attention, but thankfully no injuries or environmental impact. We commend her captain and crew for maintaining control over the situation in such tough conditions, and we also thank the local tug operators who assisted our crew and ship over much of their three-day ordeal. Key learnings from this incident were shared across our fleet. It served as a sharp reminder of the extreme importance of safety, preventive maintenance and good seamanship.

Sadly, two crew members died on our ships in 2022. While both non-work related fatalities, we still owe it to our seafarers to support their physical health and mental wellbeing as best we reasonably can. Building on our initiatives of recent years, we created a new role of “Head of Training” in 2022 (driving strategies to improve maintenance, navigation and seamanship, safety as well as health and wellbeing), we enhanced our Wellness At Sea manual and training programme with new and improved modules, we are enhancing our culture of looking after each other, and we engaged two innovative providers of remote specialist services to support our crews’ physical and mental wellbeing. Feedback from our crews has been positive.

Still on the subject of wellbeing, I share with you the story of our Captain Yu who, as Master on one of our vessels, was detained in Honduras in August 2021 when port authorities discovered drugs in a cargo hold vent shaft which they say were smuggled on our ship from the US. After 18 months, Captain Yu still languishes in a Honduran jail today without bail and without trial, despite no evidence linking him or any of his ship’s crew to the drugs. We respect the rule of law, but we are appalled by his treatment and the lack of due process, especially in the absence of evidence against him. Captain Yu and his family are constantly in our thoughts, and we are doing our utmost – including enlisting the help of the IMO, ICS, ILO and other authorities – to get our captain released and reunited with his family.

Our people are our most importance resource, and we continue to challenge ourselves on what it means and takes to cultivate an optimally equipped, competent, engaged and diverse workforce.

We strive for a culture of care, respect and non-discrimination and inclusion – a dynamic organisation in which all staff feel safe, are welcomed for their differences, have equal access to opportunities, and are supported in their individual efforts to contribute to our business’ success. This will always be a work in progress, but I am encouraged by the good mood, professional culture and positive feedback in our offices and across our fleet, which are consistent with our 82% overall staff engagement score established by independent consultants in 2022.

Having a comprehensive and world-class fleet management team in-house (with experts covering technical operations, fleet personnel and marine risk, safety and security) ensures that we can be directly involved with our seafarers and their safety, wellbeing, engagement and performance on board. This represents a significant advantage for us and our stakeholders.

Striving for ESG excellence

I believe Pacific Basin has done commendably well in at least our most material aspects of sustainability over the past several years, and our ESG ratings and awards support this. However, as sustainability generates value and increasing interest, we recognise the need to strive for greater ESG excellence.

Therefore, in early 2022, we established a dedicated sustainability team to further enhance our strategic focus on sustainable development and our sustainability awareness at every level of our organisation. The team also enables us to better address growing ESG expectations, compliance and reporting requirements, and the need for an increasingly comprehensive and holistic ESG approach. Some of our industry’s biggest sustainability challenges clearly need greater engagement and collaboration – cross-functionally within companies as well as with external stakeholders – and we made good early progress in this respect in 2022.

We embarked on a review of our sustainability strategy in 2022 with a rigorous independently-run benchmarking and stakeholder interview exercise to clarify what ESG issues are important for our stakeholders and our company, how to prioritise them and to identify gaps. Ambition-setting for our various ESG issues is ongoing and, as ever, will be constantly revisited to ensure that we keep challenging ourselves to make positive differences where they are needed the most.

Safety & Wellbeing and GHG Emissions Reduction are our top-most ESG priorities, but we also discuss our progress on other material ESG topics in the pages of this 2022 Sustainability Report.

We strive for ESG to become more fully embedded in our operations and decision-making across our business, rather than expanding a separate sustainability function.

A focus in 2023 will be to arm all our employees and teams with a better understanding and greater ownership of ESG issues most pertinent to them, strengthening sustainability in our culture and breaking down the silo mentality that we often see around ESG.

Experienced team and effective platform for a sustainable business

It is an extraordinary achievement for Pacific Basin to have been named both Shipping Company of the Year at the Seatrade Maritime Awards and Bulk Ship Operator of the Year at the IBJ (International Bulk Journal) Awards in 2022 – representing the highest recognition in our sector and our industry. We also won a Gold Award for the Most Sustainable Companies at Hong Kong’s HKICPA Best Corporate Governance and ESG Awards.

These and other environmental, safety and investor relations awards, as well as our industry-best ESG ratings reflect the hard work, professionalism and care demonstrated by our staff ashore and at sea. We are privileged to have such excellent and dedicated people in our Pacific Basin family, and I thank them all for what they do so well – and the way they do it – responsibly delivering value for our customers, shareholders, and other business partners and stakeholders. They are all worthy Pacific Basin ambassadors who underpin the reputation and resilience of our Company.

Martin Fruergaard

Chief Executive Officer

Hong Kong, 23 February 2023

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