Banks seeking to finalize framework for steel decarbonization in Q2

A group of banks including ING, Citi and Goldman Sachs, plan to finalize a framework for lending to support the global steel industry's decarbonization efforts during the second quarter, following further dialogue with stakeholders including steel companies and industry groups.

The Steel Climate-Aligned Finance Working Group, which is led by ING, expects its work will support clients and inject new capital into projects and investments, while tracking banks' lending activities tied to carbon emissions goals. Attracting financing for new steel projects may help spur market availability of lower emissions steel, as growing groups of consumers and end-users seek to decarbonize steel-intensive construction, autos and other goods.

"The purpose of this is for banks to report on the climate alignment of their lending portfolios and to serve as an engagement tool with clients," said Erik van Doezum, director for metals, mining & fertilizers at ING, in an interview from Amsterdam.

The six banks in the group, including Societe Generale, Standard Chartered and UniCredit, have discussed necessary steps and common standards, such as adopting a crude steel-based emissions benchmark. The focus is on corporate and project finance-based non-resource lending, rather than trade finance.

A separate group of 13 banks have been established to review the framework, which may support a broader and geographically wide take up of the measures, affecting steel financing in Asia and the Americas, Van Doezum said.

The Steel Climate-Aligned Finance Working Group falls under the umbrella of the Net Zero Steel Initiative (NZSI), which is part of the broader multi-industry Mission Possible Platform.

A recent model built by the MPP suggested it will cost $1.4 trillion to decarbonize steel over the next 28 years, according to Van Doezum. "Transitioning steel is a huge challenge," he said.

ING expects the working group to establish a dedicated carbon emissions-based financing association for steel. The new association can further adapt the agreed final methodology, trajectory, financial scope, data use and governance going forward.

"Much like with the Poseidon Principles, this is going to be a living and breathing agreement, so there's going to be an association that will house it," Van Doezum said. The association can adapt with changes over time.

The agreement will be modelled after the Poseidon Principles, the first sector-specific climate-aligned finance agreement for maritime shipping, which has seen bank signatories expand since 2019. The draft will align with other related initiatives and help set global best practices on climate for financial institutions that facilitate steelmaking.

The top 15 private lenders provide 50% of debt financing to the steel sector and many form part of the working group or the review group, with loans by far the greatest source of funding for steel companies, ahead of equities and bonds, said ING, citing external financial industry rankings.

Many banks may be involved in loan syndication, leading to potential for wider take up and referencing of the standards by lenders.

Several European and global steel producers have announced related investments and plans in new direct reduction iron (DRI) plants, electric arc furnace mills and adaptations to steel production and rolling facilities.

The investments are expected to benefit from lower carbon-emissions energy and optimize processes, using best-in-class or innovative technology, many yet to be commercialized. Such investments are expected to see support from various financing routes, including in Europe from government support and guarantees, specialist funds and so-called contracts for differences instruments to help provide market stability.

The Net Zero Steel Initiative aims to put the global steel sector on a path to net-zero emissions by 2050, providing a platform for stakeholders to align on a net-zero transition pathway and nurture supportive policy frameworks and financing for investment in decarbonization projects.

The International Energy Agency's November report on the steel sector noted more progress needed for carbon emissions reductions to meet the Paris-based agency's Net Zero Emissions by 2050 scenario.

Under the IEA's scenario, achieving an average 4%/year reduction in carbon intensity of crude steel production between 2020-2030 and maintaining the rate of decline after 2030 "will not be easy," the IEA said in the report.

"Potential for energy efficiency improvements will likely soon be exhausted. Thus, innovation in the upcoming decade will be crucial to commercialize new low-emissions processes, including those that integrate carbon capture utilization and storage and hydrogen, to realize the long-term transformational change required," the IEA said.Carbon prices and risk management may be crucial for related steel investments, as will low-carbon power supplies from renewables to support electrification and move away from coal and oil-based fossil fuels, and generate affordable green hydrogen.

"By leading this climate aligned finance agreement for steel, we are trying to show our willingness and how important it is we play our part," Van Doezum said.

"However it is very important to recognize the constraints and we do need government actions to facilitate that as well."