Decarbonizing steel and steel finance

Dominique Barker: Welcome to The Sustainability Agenda, a podcast series focusing on the evolving complexities of the sustainability landscape with a view on addressing current issues in a concise format to help you navigate and take action. I’m your host, Dominique Barker. Please join me as we explore today’s most pressing matters with special guests that will give you some new perspective and help you make sense of what really matters. You said you just launched in May. That’s amazing progress.

Lucy Kessler: Yeah.

Dominique Barker: Congratulations.

Lucy Kessler: Quite the clip. Yeah. So I feel like we made a lot of progress and there’s still a lot more that we need to do.

Dominique Barker: In partnership with the Centre for Climate Aligned Finance or the centre, we’re pleased to welcome you to the third episode of our little mini series on today’s episode will be focussing on the steel industry and the Steel Climate Aligned Finance Working Group. That’s a framework that’s in development by leading lenders in the global steel industry to more effectively support the decarbonisation of steelmaking. So today I’m speaking with Lucy Kessler. She’s a manager with the global climate finance team, and I’ve just found out she’s based in one of my favourite spots in Colorado, and she co-leads on steel finance for the centre. So we’re welcome to the sustainability agenda. Lucy, thanks so much for having me. So let’s start off with the first set up question, which is how carbon intensive is the steel industry? And maybe you can also go into where that carbon comes from.

Lucy Kessler: Yeah, happy to Dominique. So I think when people typically think about carbon intensive sectors, their mind goes to emissions from tailpipes or the carbon footprint of heating and illuminating homes and buildings. I think for the most part, people are probably unaware of these hidden emissions embedded in our materials, such as steel that have literally built modern society. And I like to think about it as like the footprint of steel on our modern civilisation is vast. It’s gone into buildings and roads and infrastructure, but that’s also resulted in a massive carbon footprint in our atmosphere. So the steel sector’s carbon emissions just give you a sense of a scaleit accounts for about. Estimates are seven to eight percent of the world’s total emissions, and that’s equivalent to the annual emissions of India. So to put this in perspective of the steel sector where a country would be just about the third largest emitter on the planet, and not only that, but due to economic growth and projected demand and a lot of places, especially in developing countries where demand is growing. Emissions from the steel sector are estimated to consume about 20 percent of the world’s remaining carbon budget for one point five degrees. It’s a big carbon footprint. It’s estimated to continue to grow. And not only that, this is a sector that’s considered hard to abate, and one of the reasons that it’s so carbon intensive are hard to abate. Is that a majority of steel production, about 70 percent, relies on coal to actually create the steel. So it’s used as what’s called a reducing agent to transform iron ore and remove the oxygen from it to reduce it into products such as steel.

Dominique Barker: Let me just interrupt you there, because I think most people when you think about coal, we think about going into power plants and maybe just to explain to our audience there’s thermal coal, which is the part that goes into power plants. And correct me if I’m wrong here and then metallurgical coal, which is what we’re going, right? So so when we’re talking about the coal that goes into the steel industry, it’s a metallurgical coal.

Lucy Kessler: It’s both because the creation of coal also requires a vast amount of electricity, and a lot of our electricity grid relies on thermal coal. So it’s kind of this double hitter in some you can consider at that. And as a result, for every ton rather of steel produced, there’s one point nine or about two tons of carbon dioxide that’s emitted.

Dominique Barker: Hmm. So actually, Is it possible that metallurgical coal that’s produced on a green grid is that considered better metallurgical coal?

Lucy Kessler: I don’t know that I would necessarily look at it that way. There are a number of different ways to decarbonise the steel sector, and using green electricity is certainly one, and you can create steel through using scrap and recycling scrap steel and turning that into new products. That process could rely on kind of green electricity. And there are steel mills today out there that are doing that.

Dominique Barker: Ok, so what are the other challenges and opportunities for decarbonising steel other than those methods?

Lucy Kessler: Yeah. So as I was saying, there are several emissions reduction pathways that have been identified for the steel sector. So like first, we know it can happen. We know that we can decarbonise the sector. We can get to net zero or close to net zero by 20 50. That’s the opportunity. We know it’s it’s possible. The challenge is that several of the technologies that have been identified are not necessarily commercially viable in a lot of instances or have a ways to go in order to scale to the amount that is required for the sector. So, for instance, some of those would be hydrogen power. There are renewable energy, obviously is one possible avenue. We’re talking about massive amounts here in order to really transition the entire steel sector. So one issue or challenges is scale. And just to give you kind of a sense for what’s required for scale from an investment standpoint, transitioning global steel assets to these net zero compatible. Technologies is estimated to require about an additional six billion annually, or about two hundred billion by 2050. On top of the investments that are needed to meet growing demand. So that’s pretty daunting when you think about this, especially for a low margin kind of volatile sector such as steel.

Lucy Kessler: So that’s to give you a sense of a kind of the challenges. There are several opportunities, however, and there are opportunities that are available today. So there are certain best available practises or best available technologies that can be applied today to kind of clean up or reduce the emissions intensity of blast furnaces, which are the most emissions intensive technology for steel. There’s also opportunities for material efficiency and energy efficiency. When I say material efficiency, I mean, like recycling steel. Think about how can we design our systems and our cars with less of the material. So those are some solutions and opportunities that are available today. I would say overall, however, to facilitate this transition, the industry needs a few things right. It’s not just up to the industry to move ahead with these technologies. We need a clear demand signal for green steel so that the steel companies know that if they make it, somebody will buy it. We need the policies in place, especially around carbon pricing, and we need support from some of the world’s largest financial institutions to make sure that they’re helping position the sector on track with that net zero pathway.

Dominique Barker: Great. Well, that brings us to our next question, which is the challenges and barriers for the financial institutions when we pledge to net zero in 2050 or sooner. What are the challenges and barriers for this sector in particular? And I’ll just say, I mean, six billion per year, that needs to be spent. I see that as a great opportunity for a bank. But but what are the challenges and barriers that you’re seeing as you’ve developed this framework?

Lucy Kessler: Yeah. So I think kind of first and foremost, as we were working with this group of lenders that are on the Climate Line Finance Working Group for Steel, some of the barriers were pretty fundamental is just what is that universally accepted pathway to net zero for the steel sector because there is still uncertainty around which pathway or roadmap they should choose in order to work with their clients? So there’s one, there’s a lot of questions around the pathway. Second is, once we do have a pathway, what method or metric would we use to track progress? So there’s a lot of uncertainty around that. The third is data. So how do we know if our clients are aligned, if they’re on track, who are they reporting to? How do we get access to that information? And then lastly, I think one of the big challenges or barriers is for financial institutions with aligning with one point five more broadly is that it’s one thing to set targets. But the real economy is not one point five aligned. And for the steel sector in particular, it’s going to take some technologies that are not yet commercially viable and might be seen as risky. And so that could be difficult and in some instances, really challenging for a lender in particular bank to provide that capital for riskier technologies. So you’ve

Dominique Barker: Been working with the Steel Climate Align Finance Working Group, and maybe you can tell our viewers about its objectives and maybe you can give

Lucy Kessler: Us a status. Where are you today? Yeah. So the working group is comprised of five financial institutions. It’s co-led by IMG and Society generally. And then in addition, there’s Standard Chartered, UniCredit and Citibank. The working group has come together to create this framework to allow financial institutions to measure and disclose their emissions resulting from their steel loan books. And that’s really important so that they understand where they are today and, more importantly, how much they need to do to reduce their emissions in line with net zero by 20 50. So just providing that kind of roadmap and framework for financial institutions to understand and more importantly, maybe is doing so collectively because any one bank that sets their client well, we need this data and information because we’re going to measure and then disclose our emissions associated with our our loan book. That client might decide to go to the bank down the street instead. So creating this platform and doing so collectively with a number of financial institutions, make sure that we can help avoid that first mover challenge that financial actors can be faced with in this space.

Dominique Barker: And the status today, like Where are you? Where does it stand?

Lucy Kessler: Yeah. So we launched the working group in May. We have worked to identify a methodology and metric, and we’re now in a consultation process with a number of stakeholders to identify that roadmap that the working group will use to measure their clients against. And so that consultation process is is pretty involved. We have shared our proposal with our review group of 13 or 14 additional financial institutions, we’ve shared it with an expert committee of technical experts and NGOs. We’re sharing it with industry to get feedback from several of the world’s largest steel producers.

Dominique Barker: You said you just launched in May. That’s amazing. That’s amazing progress.

Lucy Kessler: Thanks. Yeah. Congratulations. Yeah. So I feel like we’ve made a lot of progress and there’s still a lot more that we need to do. Just to give you a sense of what else is next, we are creating technical guidance so that steel sector clients know how to report and know what to report on. And then similarly, for banks to know what that guidance is for reporting. And then we also have a work stream on governance, thinking about how decisions would be made for this framework. What sort of third party platform this might take and how to govern the agreement going forward? Great.

Dominique Barker: So bringing it back to financial institutions, we’re seeing a lot of different innovative products to help mobilise capital or to help our clients transition, and certainly that speaks to CBC’s partnership with the Centre. You know, really, we’re trying to Work with you. So far, a lot of the the industries that you guys have focussed on are not areas where we’re big lenders, but we do hope to get help from you to help our clients decarbonise but just speak to sustainability, linked loans or other sustainable finance products. And what sort of role you think that they could play in Steele’s transition?

Lucy Kessler: Yeah, absolutely. So I think sustainability linked loans or transition finance, most certainly, most definitely have a role to play in the transition of the steel sector. I’d say despite the lack of immediately available requisite technologies, companies representing about 20 percent of global steel production already have set net zero targets. However, it’s clear that unlocking the investment necessary to achieve those goals are going to require a lot of innovative financing solutions. So that is the opportunity to think with transition finance, and we’ve already started to see this in a few instances for the steel sector in particular. So just to give you an example. Just this past summer, U.S. Steel amended its two billion asset based revolving credit facility to include an increase or decrease in the margin payable based on achievement of targets related to carbon reduction and not only carbon reduction, but also they included safety performance as well, and that was through certification by responsible steel. And so that’s really an important opportunity as well for these third parties like Responsible Steel to send a indication to the market as to what can be certified green steel, right? Otherwise, there’s a lot of uncertainty for the players as to what qualifies. And I just say, while there’s still a lot of work that has to be done to develop the solutions that we need to decarbonise steel, I think we are optimistic that this framework that we’re creating can really help spur needed innovation. And just an additional example is the Poseidon Principles, which is a similar framework that was created for the shipping sector since its launch in Twenty Nineteen. We’ve seen initiatives in other parts of the sector build on the momentum that was generated, and Climate Bonds Initiative adopted a similar framework that was put forth by the Poseidon Principles. And as a result, Poseidon principles has led to about just over two billion in sustainability linked finance market just within 18 months or so.

Dominique Barker: Wow. And actually, the Poseidon principles in the shipping industry is actually one of the many series that we covered in our last show. So if you want to go and take a listen to that. So, Lucy, last question for you. Let’s talk about the mission possible partnership. I believe that RMI is one of the founding partners. Is that right? Yeah. And by the way, I just got back from Cop Twenty Six and it was, you know, very prominently featured. So congratulations. Can you talk about the mission, possible partnership and the role that it plays in decarbonising steel?

Lucy Kessler: Yeah, absolutely. So I think the Mission Impossible partnership came together with this observation that there were a lot of different actors, NGOs that were increasingly crowded space of initiatives trying to do the same thing. And so the idea was, can we come together in a more coordinated, harmonised fashion where we are all synched up to position ourselves to have a greater impact as we work towards the same sort of objective? And so the climate finance working group that we manage and facilitate at the centre is one of the work streams of the Net Zero Steel Initiative. So essentially, MPP has seven hard to abate sectors. There’s initiatives on each of those, and steel was the first one that they launched and at the Centre for Climate Finance, we’re helpeing run the workstream on Climate Line Finance within the NetZero Steel initiative. And the other thing that I would say about the value and important role of the mission possible partnership, the multi-stakeholder approach. So it’s not only about engaging industry through the Net Zero Steel initiative, it’s also thinking about how we can mobilise demand through entities like Steel Zero that are operated by Climate Group. And in addition, what are the policies that we can advocate for collectively? And so it’s bringing together all of those different stakeholders and avenues or levers to help mobilise the decarbonisation of the sector.

Dominique Barker: Hmm. And maybe as an idea, you’d want to reach out to the real estate sector, which I believe steel is a big input into that for their own. That would almost be like their own scope three emissions and part of the built environment. So that’s potentially an idea idea, kernel for you. Lucy, thank you very much for your time today. This is important work that you’re doing. I cannot believe how much work you’ve done since you just launched this. I’m very encouraged and optimistic about the continued decarbonisation of the steel industry, and we will continue on with other sectors as we move along here. Thank you so much for your time today, Lucy.

Lucy Kessler: Thanks, Dominique. I really appreciate it. Your listeners can learn more about our work at climatealignment.Org.

Dominique Barker: Thank you. Please join us next time as we tackle some of sustainability biggest questions providing different perspectives to help you move forward. I’m your host, Dominique Barker, and this is the Sustainability Agenda.

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