A recent report by UCL Energy Institute and Strider Carbon maps how transition-related stranded asset risks cascade through ship finance structures and translate into traditional banking risks. The paper follows the European Banking Authority’s (EBA) position that rather than being a new risk type, ESG risks amplify existing ones.
The EBA’s Guidelines on ESG Risk Management, which came into force in January 2026 (for most institutions), require European banks to systematically integrate transition risks into their credit risk frameworks. The European Central Bank (ECB) has similarly made climate risk integration a priority, and its 2022 thematic review found that most banks remained well short of supervisory expectations in this area. This paper attempts to translate the sector-agnostic guidance for shipping – providing an example of how the guidance may translate for a capital-intensive sector with long-lived assets and complex transition pathways.
This blog post sets out what the paper argues, why it may be worth consideration, and how better analysis of these risks could help both banks and the industry’s transition efforts.
Key findings
In typical ship finance structures, the checks and balances employed by banks, along with their senior debt positions generally protect them from direct losses. By tracing how devaluations flow through the common loan structures (eg: bilateral loans, syndicated facilities, and ECA-backed structures), the analysis shows that at conservative loan-to-value ratios (LTV) typical of European ship finance, substantial asset devaluation is required before banks face direct losses. Equity held by shipowners absorbs losses first as senior debt is repaid in priority.
But transaction-level resilience is not the same as system-level resilience. The mismatch between typical loan tenors of five to seven years and vessel operational lifespans of twenty to twenty-five years means individual banks can cycle out of transition-exposed positions before end-of-life devaluations materialise. In certain scenarios, when this behaviour is prevalent industry-wide, it could transform individual credit risk management into a deferred, systemic refinancing problem. If transition concerns cause multiple institutions to simultaneously restrict lending in the mid-to-late 2030s, the resulting conditions could compress recovery values below outstanding loan balances, generating losses for the banking system as a whole, despite individual banks’ attempts to appropriately manage their own exposure.
Transition-related stranded asset risk is unlikely to materialise in isolation. The EBA’s position that ESG risks manifest through traditional risk categories suggests that transition pressures will interact with market volatility, credit quality variation, and macroeconomic shocks rather than operate independently. That interaction may amplify existing vulnerabilities rather than offset them. (See Figure 1 below)
The paper also identifies a bias in European banks’ current mitigation strategies toward supply-side risks including fleet efficiency, regulatory compliance, and technology transition. Demand-side risks, arising from declining fossil fuel trade volumes receive comparatively less attention, despite oil and gas carriers representing significant bank debt exposure. This imbalance may reflect banks’ current assessment of relative materiality, their view on how demand-side risks will affect their loan books, or the greater difficulty of translating macro-level transition scenarios into vessel-level credit decisions — possibilities the paper discusses alongside the structural barriers banks face in implementing more comprehensive transition risk management. (See Figure 2 below)
What might seem logical for shipping, and why it may warrant a closer look
Shipping practitioners have seen many risk narratives come and go. The objections to this kind of analysis are grounded in real experience and worth addressing on their merits, while explaining the nuances of the report’s findings.
Banks are rational and prudent actors — they’re unlikely to all behave the same way.
Similar lending criteria and standardised loan tenors, LTV ratios and refinancing timelines, may produce synchronised exposure even without coordination. The KG fund crisis is a shipping-specific historical example: a market where standardised structures created concentrated refinancing stress across disconnected institutions simultaneously.
Behavioural convergence (where standardised practices across disconnected institutions produce synchronised exposure) is a recognised vulnerability in financial systems broadly, not specific to shipping. A recent publication from the Dutch Authority for the Financial Markets (AFM) on capital market risks identified behavioural convergence as one of four core systemic risk archetypes. Research published in the American Economic Review demonstrates that the same features that make a financial system resilient under certain conditions can become sources of systemic risk under others; individual transaction-level resilience does not guarantee system-level stability.
Shipping is cyclical and risk management has always been central to the business.
Yes, banks have generally navigated traditional shipping cycles adequately. However, the energy transition introduces directional pressures that may not self-correct. Alternative fuel choice and compliance with emerging and geographically fragmented regulations add more variables to manage risk around.
Regulatory tightening and fossil fuel demand decline are not temporary downturns; they are structural shifts that could amplify market peaks or extend lows in ways that differ materially from historical patterns. The analogy to traditional shipping cycles may not adequately capture the nuances of the current regulatory or demand context.
There is sufficient alternative capital available to fill any potential ship finance gap.
This report concurs that capital reprices rather than disappears, and alternative financiers will step in. The uncertainty is whether replacement capital will be available at sufficient scale and on terms that support transition-related investment, or whether it will predominantly refinance established business models without transition conditionality. Private credit, leasing houses, and non-bank actors filling the gap may seek to finance models with proven returns, potentially leaving a gap for transition finance capable of de-risking new technologies and business models.
This analysis focuses on European banks. The findings may not be relevant in other jurisdictions.
If European banks tighten lending standards while non-European financiers continue to finance transition-exposed assets, the result is a migration of exposure to less regulated capital sources and jurisdictions with different transparency requirements rather than an orderly dispersion of risk. This dynamic is similar to the regulatory arbitrage observed across competing green reporting frameworks. Whether that produces a concentrated refinancing event or a more gradual repricing across fragmented markets is genuinely uncertain. The resultant fragmentation can make the aggregate picture harder to assess, rather than easier to model or manage.
Why this analysis matters
The paper proposes that a more precise analytical lens, built on tracing transition risks through the capital stack can give banks a better basis for understanding where their portfolios are resilient and where vulnerabilities may be building. That matters for two reasons:
First, better risk pricing would direct capital more efficiently. Banks that price transition risk in line with their risk appetite would move towards financing vessels that better fit their short- and long- term criteria. Where banks maintain exposure to transition-sensitive segments for strategic reasons, this framework can help identify where asset stranding risk may concentrate, thereby supporting banks in tailoring lending conditions.
Second, understanding where conventional bank debt fits in the capital stack is essential to financing the transition itself. Bank debt is designed for established, bankable business cases with predictable cash flows and proven commercial models. It is not well suited to absorbing technology risk, first-mover commercial uncertainty, or the kind of early-stage losses that characterise emerging decarbonisation pathways. Recognising that limitation is a prerequisite for designing financing structures that place different forms of capital where they function best: venture and strategic capital for early-stage technology risk, public finance and grant mechanisms for de-risking projects toward bankability, and conventional bank debt once commercial viability is demonstrated.
Figure 1: Translating shipping’s transition risks to traditional risk categories in banking
Source: Colluru et al. (2026) Exploring the financial impacts of transition-related stranded asset risks, London, UK
Figure 2: Shipping transition risk mitigation: Current bank actions by implementation maturity and risk type
Source: Colluru et al. (2026) Exploring the financial impacts of transition-related stranded asset risks, London, UK
The full report is available here. This analysis is intended as a starting point for more granular work.
Practitioner input on where it holds and where it needs refinement would be particularly valuable.