Banks can play a major role in either enabling the economy’s addiction to fossil fuels, or ending it. Recent financial sector initiatives like the Glasgow Financial Alliance for Net Zero (GFANZ), and its banking subgroup, the Net Zero Banking Alliance (NZBA) show growing recognition of this. Voluntary initiatives like these signal that there’s an understanding amongst the financial sector of their role and responsibility in the climate crisis, and an appetite to use their capital to support the transition.

One of the latest climate-focused voluntary initiatives by the financial sector is the Sustainable Steel Principles, which aims to “make climate part of every steel loan”. This is absolutely necessary, as the steel industry is responsible for an estimated 7-11% of global CO2 emissions. Steel’s severe climate impact comes from its reliance on metallurgical coal (i.e coal used for steelmaking), which meets 75% of the sector’s energy needs. According to the Net Zero by 2050 scenario of the International Energy Agency (IEA NZE), to bring the steel sector in line with the Paris climate goals, the sector's emissions need to drop by 24% by 2030 and almost 91% by 2050 relative to 2020 levels. This cannot be done without ending steel’s reliance on coal.

Fossil-free steelmaking is becoming an increasingly viable alternative, but an expensive one. Some estimates suggest an additional US$ 8 to 11 billion in investment annually will be needed to transition the existing steel plants from coal to clean. A recent report by Agora Energiewende found that a coal phase out in steelmaking is technically possible by 2040. Recent advancements in Direct Reduced Iron (DRI) technology allow steelmakers to replace coal with green hydrogen - a form of hydrogen made with renewable energy. Additionally, steelmakers can increase the share of steel that is recycled through Electric Arc Furnaces (EAFs), which melt down scrap steel and recycle it into new steel in an entirely fossil-free production process.

But this transition will require a major transformation in not only how steel is produced, but where and by whom. As major lenders to the steel industry, banks have a responsibility to speed up the industry's transition to coal-free steelmaking. Steelmakers will require both pressure and support from their financiers to make the switch from coal-fired to renewables-based production routes. Financiers will also have a major role to play in ensuring this is a just transition, where workers and proximate communities are compensated fairly, and considered active decision makers in the transition.

Given their essential role, it’s a welcome development that some banks are committing to decarbonising their steel portfolios. But are the Sustainable Steel Principles delivering enough, given how quickly we need to end steel’s coal dependency?

What are the Sustainable Steel Principles?

The Sustainable Steel Principles were launched September 2022, by the Rocky Mountain Institute (RMI). Currently six of the largest lenders to the steel industry - Citi, Crédit Agricole, ING, Société Générale, Standard Chartered and UniCredit - have signed onto the Principles. According to RMI, these six banks represent “approximately US$ 23 billion in lending commitments to the steel sector, for a market share of over 11% of total private sector steel lending”.

The Sustainable Steel Principles are essentially a commitment to report on financed emissions. By signing on, the banks have committed to measuring and disclosing the 1.5°C alignment of their steel lending portfolios on an annual basis. This is expressed through an alignment score. The score is a metric based on a set of calculations that takes into account:

1. The average fraction of scrap-based inputs used in steel production across the steelmakers in their steel clients.
2. The average “emissions intensity” (i.e. amount of CO2e released per ton of steel produced) of their steel clients.

It’s then benchmarked against an “upper and lower” target defined by two different net-zero scenarios: the already-mentioned IEA NZE, and the industry-backed Mission Possible Partnership scenario. The benchmarks for alignment differ depending on the average scrap input. In short, the more their borrowers produce using scrap metal recycling, the easier it is for them to be 1.5°C  aligned.

Limitations in scope

Alignment score While it’s useful to have financed emissions pre-benchmarked against a 1.5°C  scenario through the alignment score, banks are not required to publish some crucial pieces of information. This makes it difficult to hold financial institutions accountable and means third parties, like civil society organisations, cannot independently track the climate progress of banks. For example, absolute financed emissions do not need to be reported (i.e. the actual amount of CO2 or CO2 equivalent emissions released in steel production financed by a bank). Banks are only required to disclose their alignment score and a brief narrative giving context to the score. They are not required to disclose the actual average emissions intensity of their portfolio, their absolute financed emissions, or what percentage of their portfolio is made up of scrap-based steel production.

Emissions intensity Many benchmarks for the steel sector are currently focused on emissions intensity metrics, so reducing the amount of emissions per ton of steel produced. The rationale behind this is that because steel as a product does not need to be completely phased out, it is more important to focus on the relative emissions of production and to incentivise a shift towards lower emissions production methods. However, it’s clear that for the sector to align with the Paris climate goals, steelmakers need to produce less steel. While the IEA predicts that steel demand will increase by a third through to 2050, other pathways like the Mission Possible Partnership, have found that increasing “material efficiency and circularity measures” (i.e. reducing steel usage to curb demand) plays a major role in decreasing the climate impact of the sector. Banks should not take growth in steel demand as a given, and rather should actively work with their steel buying clients, carmakers for example, to reduce demand through measures of material efficiency.

Coal mine methane The emissions that are accounted for in the Sustainable Steel Principles are defined by a “fixed systems boundary” which determines which steps of steel production are included in the final carbon count. This boundary makes it possible to compare steelmakers of varying sizes and geographies, by making explicit which activities are and are not included in the total count of emissions. While this is a good first step, the current boundary has a major omission: coal mining.

A report by climate thinktank Ember recently found that methane emissions from metallurgical coal mining could double the global warming potential of a batch of steel. If these emissions are not included in the final count, banks run the risk of severely underreporting their steel-sector emissions. Banks may argue that these emissions should rather be reported under a different framework, for example as part of mining industry emissions. However, given that most banks have insufficient thermal coal policies, and tend not to include metallurgical coal in their coal policies, it appears that these emissions are not taken into account anywhere in their emission disclosure frameworks.

Moreover, regardless of these details on the methodology used for carbon accounting and reporting, one thing is clear: measurement and disclosure alone won’t be enough to move steelmakers away from coal.

Steel needs ambitious leadership from banks

Public disclosure of financed emissions is an important first step in financial sector climate leadership. While disclosure commitments are a necessary condition to climate action, alone they cannot serve as a stamp of climate leadership for banks. As is the trend with other climate-focused voluntary initiatives from financial institutions, much of the language included in the Principles is suggested - not required. To be a member of the Sustainable Steel Principles, all that is required from banks is to measure, disclose, and benchmark their emissions against two different 1.5°C pathway scenarios. Things like client engagement to ensure 1.5°C alignment, disclosing which percentage of their portfolio is covered by a 1.5°C target, and setting targets as a bank for financed emissions reductions are all optional.

But this in itself is not enough. To be strong leaders on steel decarbonisation, banks must make sure they’re actively decreasing their financed emissions on a year-to-year basis, and ensuring their clients are setting ambitious and just decarbonisation strategies. Leadership also means going beyond what one can expect from voluntary initiatives. There is growing fear of antitrust litigation against collaborative climate action by companies. Whether or not this fear is justified in a strict legal sense, in this context it’s imperative that banks also act individually to do what can’t be done under a collective agreement, but must be done for decarbonisation.

For example, the Sustainable Steel Principles don’t (and supposedly can’t because of the antitrust litigation concerns) mention the elephant in the room with regards to steel decarbonisation: blast furnaces. Blast furnaces - which convert iron ore into iron that can be used for steel, and make up 75% of the world's ironmaking capacity - can only run on coal. This means that phasing out blast furnaces is essential to mitigating the climate impact of the steel industry. To remain under 1.5°C, only blast furnaces where at least  90% of CO2 is captured through carbon capture and storage (CCS) can be built past 2025. However, CCS has so far not been proven effective for steelmakers, meaning that de-facto all blast furnaces need to be phased out. Replacing coal-based facilities with fossil-free technologies will prove far more effective for emissions mitigation.

To date, no banks have an exclusion policy for blast furnaces. However, four banks - HSBC, Nordea, Lloyds Banking Group, and Caixa Bank - have adopted exclusion policies for new metallurgical coal mines and/or processing facilities. While imperfect policies, climate leadership necessitates taking concrete action to reduce the use of coal in steelmaking. Banks committing to exclude finance for blast furnaces is the next step.

Strengthening the Sustainable Steel Principles

Banks committing to steel decarbonisation is an important first step, but to ensure that their measurement and disclosure practices eventually lead to an actual reduction in real world steel emissions, we recommend the following for the Sustainable Steel Principles:

1. Require banks to disclose their emissions intensity, absolute emissions, and average scrap input: Together these three pieces of information tell an important story about a bank's portfolio, and their commitment to decarbonisation. Reporting the alignment score in isolation doesn’t give enough context to the decarbonisation approach of a bank.

2. Require banks to publish emissions reduction targets and progress against said targets on an annual basis: Becoming 1.5°C aligned will require massive emission reductions by 2030. Going beyond disclosing the alignment score currently part of the SSPs, target setting discloses the level of ambition a bank has, and their commitment to 1.5°C alignment.

3. Include coal mining in the fixed systems boundary or require banks to set separate coal mine methane reduction targets: Coal mine methane can double the warming potential of a batch of steel. To develop a truly transformative decarbonisation strategy, banks must assess the full lifecycle emissions of steel.

What banks must do on steel

Measurement and disclosure of financed emissions is only the beginning of what banks can do to push the steel industry towards fossil-free steel. To steer steel decarbonisation with the urgency that is needed, we call on individual banks to do the following:

1. Only provide financial products and services to steelmakers who:

   • Have a robust public climate plan with a commitment to a 2050 net zero objective, aligned to a 1.5°C pathway. This plan should not rely on biomass, CCS, or offsetting to achieve 1.5°C, and should cover short, medium and long term GHG emissions reduction targets for Scopes 1, 2 and 3, (with particular attention to methane emissions from the mining of sourced coal), expressed in both emissions intensity and absolute emissions.

   • Have publicly committed to not expanding their coal-based steelmaking capacity.

   • Have publicly committed to not expanding the lifetime of their existing coal-based steel making facilities, and instead, replacing them with fossil-free technologies when they reach the end of their lifetimes.

   • Are fully compliant with the UN Guiding Principles on Business and Human Rights

2. Exclude financial services and products for the following types of projects:

   • The construction, or expansion of new or existing metallurgical coal mines

   • The construction, renewal or expansion of coal-based steel production facilities, such as Blast Furnaces to Basic Oxygen Furnaces (BF-BOFs)

   • DRI facilities that are not built “green hydrogen” ready, and without a detailed transition plan and timeline

3. Take a holistic approach to steel decarbonisation, working with their steel buying clients (especially the automotive and construction industries) to:

   • Increase material efficiency and circularity to decrease primary steel demand.

   • Ensure that proper provisions are in place to protect the quality of steel, so it can be recycled for scrap at the end life of the product.

4. Recognise that green hydrogen is necessary only for “hard-to-abate” sectors like steel, and not a viable solution for the power sector. Financing of green hydrogen projects/clients should be conditional on the end use of the green hydrogen for industry, and additionally, should ensure that the production does not put pressure on water-stressed areas, nor compromise drinking water.

The coming decade is critical for steel decarbonisation, with more than 70% of existing coal-fired blast furnaces up for reinvestment by 2030, and 138 new metallurgical coal mining projects in the pipeline, banks need to act swiftly to ensure their capital is going towards green steel production, and not towards a sector that will continue to rely on dirty coal for decades to come. The banks who have signed onto the Sustainable Steel Principles have taken the first step towards being  leaders in decarbonising the steel sector, but can absolutely do more.