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Accountants can steer shipping through a sea of megatrends

Author: ICAEW Insights

Published: 27 Jul 2023

Accountants will be increasingly vital strategic partners in an industry facing challenges from carbon crackdowns, technology shifts and sanctions, says Costas Constantinou - Global Leader, Shipping, at Moore Global

“Traditionally, shipping has been invisible in the eyes of everyday people – something that happens behind the scenes, in a direct relationship with industry.”

That’s the assessment of Piraeus-based ICAEW member Costas Constantinou – Global Leader, Shipping, at Moore Global. As a result of the sector’s remoteness, he says, we have taken it for granted that fuel, food and raw materials from all over the world will keep our industries moving and our supermarkets stocked.

However, he notes, as geopolitical tensions raise awareness of the critical role played by supply chains, shipping is having more time in the spotlight than usual – a position to which the small-c conservative industry, not renowned for intensive lobbying efforts, is unaccustomed.

“Unlike other sectors, shipping doesn’t have much voting power as it is a capital intensive industry, with a relatively small workforce compared to heavy industry, agriculture or services,” Constantinou says. “So shipping has been an easy industry for politicians to legislate for – and sometimes that legislation is overcomplicating matters in an industry which is purely international.”

Now, though, an emerging set of megatrends is exerting inexorable pressure upon shipping to change from within.

Future fuel

Constantinou describes the changes facing the shipping industry as “tectonic” in nature, saying: “No one can feel that the earth’s plates are moving, but they do, and they shape the world we live in – progress is relentless, and we can’t stop it.”

The risk, he stresses, is that while larger organisations can afford to spend their way through the changes, smaller companies with fewer resources could be terminally outpaced – unless they remain alert to how they will need to adjust their business models.

First and foremost among the key megatrends is decarbonisation: “Regulators have put the onus on shipping companies to address this challenge, but they are not the organisations that have designed the ships or formulated the fuel. So it’s rather like telling an individual truck operator: ‘We want you to become net zero by 2050 and it is entirely your responsibility.’”

Alternative fuels, he notes, are provoking particularly high levels of uncertainty around the long-term viability of vessels. “We can no longer say for sure whether a brand new ship that was just delivered at a cost of $200m will serve us for 25 years, as we could a decade ago,” Constantinou says. “In 10 years’ time, that ship could become obsolete, because it may not be able to burn what regulators or the markets eventually decide as future fuel.”

Perhaps such ships could be pushed out of the market altogether, becoming stranded assets – or would be required to undergo lengthy conversions that would cost millions to execute in materials and downtime. “Either would have a knock-on effect on finance,” Constantinou says. “If the asset value drops, then the banks will get edgy and demand prepayment on their loans. So it’s a very fluid time, from both a technological and forecasting standpoint.”

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Ship to shore

On closely related turf, Constantinou sees environmental, social and governance (ESG) reporting as a major growth area for the sector’s finance professionals. Accountants will certainly be called upon to write ESG reports, and/or help install the systems that will feed data into them, he says.

“Those systems will need to provide answers to key ESG questions that report preparers will naturally ask of shipping companies – for example: how many accidents do you have on your vessels? What does your safety training look like? What is your diversity policy for gender and ethnicity? All that information must flow from ship to shore in a systematic fashion.”

Constantinou notes that accountants in shipping will soon be required to provide audit opinions on sustainability reports. “If you are giving an opinion in accordance with International Standards on Auditing, you must understand the relevant control environment and the reliability of the data,” he says. “How does that arrive from the shipping company’s fleet and HR department? We must prepare our clients for this.”

For Constantinou, this work amounts to an exciting challenge. However, he stresses, the shipping industry must recruit more accountants in order to face it.

First principles

Of equal importance for the sector’s finance professionals to grasp, he says, are shifts in automation and digitalisation: “Accountants don’t tend to get involved with how a company uses technology – for example, whether it deploys drones to clean out cargo holds, or robotics to clean ships’ hulls. But from an auditing perspective, we must understand the effects of those forces.”

This also applies to digital facilities, such as:

  • blockchain – which, in theory, could ensure that cargoes containing hundreds of thousands of parcels will no longer need to be checked as rigorously as they are now;
  • cryptocurrencies – which could become accepted forms of payment in shipping; and
  • tokenisation – which could be used as a method for buying and selling ships.

“I don’t have the answers yet, and neither does the profession,” Constantinou says. “But we need to go back to first principles with these trends and ask what are our assets and liabilities. And with tokenisation, what do we recognise in our books – and how?”

Strategic partners

With geopolitical strains showing no signs of abating, the final, main megatrend affecting the sector is compliance with sanctions – a matter of increasing complexity.

“It is very new for a shipping company to carry out Know Your Customer (KYC) due diligence on its counterparties, but at a time when the EU, US, Australia, the UK and even the UN all have different sanctions regimes, it is more vital than ever to comply – especially with American sanctions, because getting on the wrong side of the US Treasury would be catastrophic.”

Indeed, he notes, some shipping companies may need to use ‘KYCC’ – Know Your Customer’s Customer – procedures for additional security and peace of mind.

For Constantinou, the skillset of accountants is ideally suited to the tasks of demonstrating to regulators what sorts of safeguards shipping companies have put in place to achieve compliance, and helping companies to develop those safeguards in the first place.

His view of how the profession can guide the shipping industry in the coming years extends across the full range of megatrends. “Unlike lawyers and engineers, accountants have a skillset and mindset that combines many disciplines, along with a solid understanding of shipping operations. They are therefore best suited not only to report on, but also to plan for and manage the risks of those tectonic changes that are happening right now.”

The primary skill required of accountants is strategic partnerships to help shipping companies find their optimal point in the learning curve, he explains. “You don’t want to be so far ahead that you are committing to high costs prematurely, and you don’t want to be so far behind that you are scrambling to catch up with your competitors.”

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