The steel industry is one of the titans of the modern world. Steel is used in vast quantities across the construction, transport and infrastructure sectors, and found in everything from household appliances and medical devices to food packaging and firearms.
And steel is playing a crucial role in the energy transition – wind turbines, electric vehicles and electricity networks all rely on steel.
Yet the steel plants that produce this vital material also belch out prodigious amounts of carbon dioxide and other polluting gases. The industry, which is responsible for 7-9 percent of global greenhouse gas emissions, is perhaps the prime example of a “hard-to-abate” sector.
Transforming steelmaking into a green industry therefore poses one of the greatest – and most expensive – challenges on the road to net zero. McKinsey estimates that the bill for decarbonising the sector will come to $4.4 trillion over the next 30 years.
Investors have begun to engage with publicly listed steelmakers on their plans for decarbonisation over the past few years, but progress has been uneven.
The Institutional Investors Group on Climate Change (IIGCC) noted in August 2021 that the world’s five largest steelmakers had all committed to reaching net zero emissions by 2050. But it warned that smaller companies, collectively accounting for 80 percent of emissions, had failed to make net zero commitments.
Continued engagement with steelmakers is “definitely” a priority for investors, said Rupert Krefting, head of corporate finance and stewardship at M&G Investments. “There’s no silver bullet,” he added. “What we need to do is lots of little things that add up to something quite substantial.”
Indeed, multiple options are available for steelmakers seeking to reduce their carbon footprint. Incremental efficiency improvements can make a significant difference, particularly in developing countries where steel plants are often less energy efficient.
Increasing the proportion of scrap metal used in steelmaking will also be important. The IIGCC estimates that increasing the ratio of steel produced from scrap from 23 percent today to 60 percent by 2050 would deliver a 32 percent reduction in industry emissions.
But the most difficult steps towards greener steel will involve major changes to the steelmaking process itself.
Currently, most steel is produced through a method known as the blast furnace and basic oxygen furnace route. This uses metallurgical coal as a reducing agent to separate iron from the oxides found in its ore, and to generate the immense heat needed in the blast furnace to smelt iron ore.
The good news is that there is an alternative to this extremely carbon-intensive process: the direct reduction iron (DRI) and electric arc furnace (EAF) route. Unlike in traditional blast furnaces, EAFs rely on electric power rather than coal to generate heat.
Where DRI processes are currently used, they rely on either natural gas or coal to act as the reducing agent to remove oxides from iron ore. However, efforts to employ green hydrogen as a reducing agent have gained significant traction recently.
“Hydrogen-based DRI is now the front-running solution for steel decarbonisation,” said Simon Nicholas, an energy finance analyst at the Institute for Energy Economics and Financial Analysis.
“The second half of last year saw some real progress in Europe. We saw companies move away from just making announcements about future plans to actually announcing investment decisions and funding.”
Nordics steal a march
In August last year, Stockholm and Helsinki-listed steelmaker SSAB delivered the world’s first “green steel”, produced using green hydrogen and renewable energy. The pilot project, undertaken alongside Swedish energy and mining companies Vattenfall and LKAB, marked a step towards SSAB’s ambition to eliminate CO2 emissions from its operations by 2030.
“We see a demand from our customers for fossil-free steel,” said Christina Friborg, SSAB’s executive vice president and head of sustainability. She added that the company’s attempt to become a first mover in the race towards “fossil-free steel” has also been partly driven by its shareholders’ need to decarbonise their portfolios.
“The shareholder perspective has been important for us,” she said. “We clearly see an increasing interest in SSAB as an investment since the introduction of our fossil-free strategy some years ago.”
Meanwhile, Swedish start-up H2 Green Steel passed several milestones last year as it seeks to build the world’s first large-scale green steel plant. The company held successful equity and debt financing rounds and signed a supply agreement with BMW. Several other schemes in the Nordics are also gaining momentum. Norwegian company Blastr Green Steel announced a €4 billion project for a green steel plant in Finland in January.
These Nordic players are hoping to benefit from customers willing to pay a premium for green steel. Their efforts may provide a wake-up call for much larger international steelmakers. But the idea that the rest of the industry will go all-out for rapid decarbonisation is unlikely to prove realistic – at least without significant public sector backing.
Decarbonising the sector will, of course, rely on new technologies scaling up and becoming cost-competitive. But governments are willing to lend a helping hand in many jurisdictions.
The European Commission approved a €1 billion German government grant to Salzgitter, one of the country’s major steel producers, in October. The company plans to invest in a new DRI process using green hydrogen, which would reduce its CO2 emissions by 95 percent by 2033.
Erik Alhøj, CEO of Engagement International, a company that conducts corporate engagement on ESG issues on behalf of asset owners, said investors adopt a realistic view on the pace of change.
“Our investor clients accept that this is one of the difficult industries,” he said. “It certainly may hold them back from demanding significant immediate lowering of emissions – something most steel companies would say is impossible to a large extent.
“However, it should not and – in our experience – does not prevent investors from pushing the companies to move forward as far as realistically possible.”
Alhøj said Engagement International has identified “climate laggards” in the steel industry that are making no progress towards decarbonisation. But on the whole, steelmakers are “listening to the recommendations we provide on behalf of our investor clients”.
“Companies certainly feel investors’ pressure. They respond quite actively to investors’ requirements regarding presentation of data and disclosures, and many conduct (and publish) climate risk analysis.”
The onus is now on steelmakers to move from reporting data and unveiling ambitions to providing the specifics of their transition plan.
“Certainly, it’s trickier in the steel industry at this stage to reduce carbon emissions than it is in, say, the power sector,” said Nicholas. “But there is some sense now that this ‘hard-to-abate’ phrase is being used as an excuse to push real decarbonisation.
“I see a lot of companies that give very little detail on what the long-term plan is to reach net-zero emissions.”
Nicholas is particularly sceptical of companies that are placing their hopes on carbon capture utilisation and storage (CCUS).
“This is something that really needs to be questioned by investors more and more,” he warns. “These vague, long-term plans being put out there by steel companies just seem to suggest that at some point, at an unspecified date, they will retrofit their blast furnaces with carbon capture units. And it just seems to be an excuse to keep going as business as usual and building these blast furnaces.”
The International Energy Agency did allow a major role for CCUS in the roadmap for reducing steel sector emissions that it published in 2020. It estimated that CCUS would account for 16 percent of the emission reductions needed for steel to align with climate goals by 2050.
On the other hand, the UN-backed Net Zero Asset Owner Alliance confirmed in January that “carbon removals” would not count towards members’ 2030 emissions reduction targets. The announcement will do little to encourage investor enthusiasm for CCUS in the steel industry.
What does green look like?
The thorny debate on carbon capture goes to the heart of the question over how the steel industry should decarbonise.
“We are very aware that steel companies and investors are not always talking the same language when it comes to decarbonisation – how you measure decarbonisation, how you measure progress, how you measure commitment,” said Annie Heaton, CEO of ResponsibleSteel, an initiative that runs a certification scheme for steel producers.
ResponsibleSteel, which certifies steel plants against a range of ESG criteria, is one of several initiatives seeking to address the lack of clarity around decarbonisation.
The organisation added requirements on greenhouse gas emissions to the latest version of its standard. It also announced the formation of a finance working group last month, which will aim to promote dialogue between steelmakers and financial institutions in the hope this will lead to greater investment in decarbonisation schemes.
Meanwhile, the Science-Based Targets initiative (SBTi) has recently concluded a consultation period on draft guidance for the sector. A spokesperson for SBTi confirmed to Responsible Investor that the guidance and an accompanying tool are set to launch in the second quarter of this year.
The SBTi spokesperson noted that investors would be able to use the guidance and tool “to set targets to converge the physical emissions intensity of their financed emissions in the steel sector down to a global sectoral level that is in line with a 1.5C pathway by 2050”.
In its current form, the SBTi guidance would require companies to reduce emissions by between 26 and 40 percent (depending on the proportion of scrap and the method of production used) from 2020 levels by 2030.
Alhøj believes the new SBTi benchmarks will be welcome news for steel investors. “It will be easier to distinguish between the steel companies that are net-zero aligned, and those that are not,” he said.
Another potentially significant development comes from the Climate Bonds Initiative. In December, it launched criteria under which steel companies can issue certified climate bonds. Given the massive cost of investing in green hydrogen-based DRI and EAFs, more steel companies may be expected to turn to the bond market in the coming years.
But Fabio Passaro, transition programme policy analyst at the Climate Bonds Initiative, noted that sustainability-linked bonds and other sustainable finance instruments have rarely been used in the steel sector up to now.
“The share is very low compared to the investment needs that are there,” he said. “Our analysis has led us to think that the reason behind that is mainly… the fact that there wasn’t clarity, and no-one could trust what green bonds really were.”
Investors, Passaro said, need clarity “on what green looks like and what is really green”. “That is why you need specific standards and – in this case – sector-specific criteria to make sure that the transition is credible,” he said, “to make sure that asset owners know what the pathway to real decarbonisation in line with 1.5 degrees is, and to make sure that both existing and new production plants are aligned with 1.5.”
Investors in the steel sector are increasingly able to benefit from better tools to help them engage effectively with producer companies, and to distinguish which companies are leading and lagging in the climate race.
Many institutional investors are committed to achieving significant portfolio emissions reductions by 2030 or even 2025. Although the world’s largest listed steelmakers have all made some kind of commitment to achieve net zero emissions by 2050, the steel industry can expect greater investor pressure to turn targets into actions within the next few years.
Krefting from M&G Investments says investors will “concentrate a lot more on the granularity of the transition plans” now that the clock is ticking towards 2030.
“The focus so far has been just on getting the companies to come up with net zero targets,” he said. “The next phase is to get more and more granular.”