Decarbonization: steel not making the cut
Cynthia Rocamora, Reclaim Finance, Industry Campaigner
Cynthia Rocamora, Reclaim Finance, Industry Campaigner
Due to its reliance on metallurgical coal, the steel sector produces 11% of global CO2 emissions, making it the largest industrial emitter of CO2. (1) Decarbonizing the steel sector is therefore critical to achieving the 1.5°C target. (2) To align their portfolios with 1.5°C by 2050, financial institutions must adopt measures to end the development of new metallurgical coal mines and coal-based infrastructure in steelmaking. Even if the adoption of steel decarbonisation targets does not avoid the need for robust sector policies, it is imperative that the institutions that take the plunge and adopt steel targets ensure that they are effective. Analysis by Reclaim Finance shows that few financial institutions have steel targets, and that those that have been adopted are riddled with flaws.
The massive greenhouse gas footprint of the global steel industry is mainly due to its reliance on coal to make coke for use in blast furnaces. Because demand for steel is projected to keep rising, getting coal out of steel is essential in 1.5°C pathways. Fortunately, solutions already exist to enable steel to clean up its act. Financial institutions need to put in place policies to ensure that these solutions are implemented and that steel companies stop investing in new high-carbon infrastructure.
Banks are (just) in the lead on steel
Reclaim Finance has reviewed the practices of 150 banks, insurers and investors (3) in the steel and metallurgical coal sector. Alarmingly, we have found that almost nothing is being done by financial institutions to prevent investments in new metallurgical coal mines and coal-consuming blast furnaces, both long-lived investments which need to end if the steel sector is to align with 1.5°C. While some investors are engaging companies in both sectors, the policy commitments that we have identified have all been taken by banks. None of the 60 banks covered in our analysis seem to have adopted a sector policy related to steelmaking companies, but four banks have committed to restrict their financial services to metallurgical coal.
Sixteen banks out of the 60 assessed have so far adopted a steel decarbonization target. (4) The Net-Zero Banking Alliance (NZBA) requires its members to adopt sectoral targets (and is the only GFANZ alliance to do so), but does not specify which sectors should be covered. (5)
Very few and very disparate commitments
- None of the analyzed financial institutions uses both absolute and intensity metrics in their steel decarbonization targets as recommended by the UN High-Level Expert Group on net zero (HLEG). (6) And only one bank – MUFG – has a steel target based on absolute emissions. Absolute targets are necessary to ensure reduced financed emissions to the atmosphere. Intensity targets are helpful to compare commitments between different financial institutions, but used on their own do not show the rate at which actual emissions to the atmosphere are increasing or decreasing.
- Only two banks – Barclays and JPMorgan Chase (7) – have adopted targets covering both lending and underwriting-related capital market activities. (8) By not covering these activities, banks do not cover an important part of their role in financing steel-sector emissions and fail to properly be aligned with the IEA’s Net Zero by 2050 scenario (and the recommendations of HLEG). (9)
- No financial institution in our research is currently targeting steel Scope 3 emissions, even though these may account for more than a quarter of the total emissions of the steel sector. (10) Targeting upstream Scope 3 emissions would allow financial institutions to address the issue of coking coal mine methane (11) which is estimated to add 27% to the steel industry’s overall 20-year climate impact. (12)
- None of the analyzed financial institutions specifically targets methane emissions. While eight banks set their targets based on CO2-equivalent (CO2e) as required by the NZBA – and thus combining both CO2 and methane warming effects – seven banks set their steel emissions targets based only on CO2 emissions. Both are inadequate to tackle the powerful short-term impact of methane emissions on climate and leverage the significant climate benefits of immediate reductions in methane emissions. As recommended by HLEG, financial institutions should set separate reduction targets for both CO2 and methane.
Steel decarbonization targets content – April 2023
You can see the results of Reclaim Finance’s research on 150 financial institutions with only 16 banks with steel targets with a table featured here.
To fully play their part in decarbonizing the steel sector, financial institutions must adopt HLEG-aligned emission reduction targets and robust policies that end financial services that contribute to prolonging the use of metallurgical coal by the steel sector. While efforts need to be made to guarantee the adoption of effective targets, MUFG’s recent decision to finance the construction of new blast furnaces by ArcelorMittal and Nippon Steel in India (13), despite having adopted steel decarbonization targets (14), demonstrates the inefficiency of targets to alone secure the alignment of the steel sector with a robust 1.5°C trajectory.
- The iron and steel industry accounts for around 7% of global greenhouse gas (GHG) emissions and 11% of global carbon dioxide (CO2) emissions. Global Efficiency Intelligence, Steel Climate Impact: An International Benchmarking of Energy and CO2 Intensities, April 2022
- In its Net Zero by 2050 scenario (NZE), the International Energy Agency (IEA) models a 24% decrease in absolute CO2 emissions by 2030 compared to 2020. IEA, Net Zero by 2050 – A Roadmap for the Global Energy Sector, May 2021. This concerns emissions for Scopes 1 and 2.
- Research carried out by Reclaim Finance in April 2023 on 150 financial institutions, including 60 banks from the Banking on Climate Chaos 2023 report, the top 30 asset owners and top 30 asset managers from Thinking Ahead Institute rankings, and the 30 insurers covered in the 2022 Scorecard on Insurance, Fossil Fuels & Climate Change.
- All are members of the NZBA, except DZ Bank, which is a member of Net Zero Banking Alliance Germany.
- The NZBA requires banks to publish a first group of targets 18 months from joining and gives them another 18 months before they need to have in place targets that cover “a substantial majority of carbon-intensive sectors.” Banks are free to decide whether or not to include steel in the covered sectors.
- HLEG, Integrity Matters: Net Zero commitments by businesses, financial institutions, cities and regions, November 2022, p.17
- JPMorgan Chase includes “underwriting in debt and equity capital markets”, JPMorgan Chase, Sustainability commitments, December 2022. Barclays includes “capital markets activities”, Barclays’ Climate Strategy, Targets and Progress, March 2022
- The NZBA only requires the targets to cover lending and investment activities. It states that it will “consider” requiring its members to set targets for “off-balance sheet activities, including facilitating capital market activities” (i.e. underwriting and related activities) in the next version of its guidelines supposed to be completed by April 2024. NZBA, Guidelines for Climate Target Setting for Banks, p.7, April 2021
- HLEG, Integrity Matters: Net Zero commitments by businesses, financial institutions, cities and regions, November 2022, p.24
- CDP Technical Note: Relevance of Scope 3 Categories by Sector, April 2023
- Coking coal can be defined as “high-quality coal to produce coke used in blast furnaces to make pig iron. Coking coal and metallurgical coal are terms sometimes used interchangeably.”, IEA, Coal 2022, December 2022
- Ember, Why the steel industry needs to tackle coal mine methane, January 2023
- Reuters, AMNS Luxembourg inks $5 bln loans deal with Japanese banks to fund India JV, April 4, 2023. The consortium also includes Japan Bank for International Cooperation, Sumitomo Mitsui Banking Corp, Sumitomo Mitsui Trust Bank, Mizuho Bank, and Mizuho Bank Europe NV.
- MUFG Progress Report, April 2023
This text was originally posted on Reclaim Finance's website here.