Banks to standardize approach to support steel decarbonization, study aluminum

A group including ING, Societe Generale and Citi are recruiting banks to join newly agreed standards around benchmark lending to the global steel industry in support of carbon emissions reductions, ING said July 6.

The new Sustainable STEEL Principles establishes a fixed system boundary of emissions and offers two net-zero scenarios for benchmarking under the target to limit global temperature increase to 1.5 degrees Celsius, according to the Rocky Mountain Institute's Center for Climate-Aligned Finance. Portfolio management based on the criteria developed may help drive banks in shaping steel decarbonization results at companies under their loan book, while the data may be reviewed in allocating capital and priorities against broader targets.

"The aim of the Sustainable STEEL Principles is to establish a common, industry-appropriate baseline to quantitatively assess and disclose the alignment of steel lenders with climate goals," RMI said.

The framework, which draws on steel sector scenarios from the International Energy Agency and the Mission Possible Platform, has been reviewed by a larger number of banks and will launch at NYC Climate Week in September.

ING, Societe Generale, Citi, Goldman Sachs, Standard Chartered and UniCredit developed the climate-aligned finance agreement following consultations with the steel industry and stakeholders for over a year. More than 80 stakeholders reviewed and informed the agreement components, including representatives from the financial sector, industry leaders, and decarbonization experts, according to RMI.

The group are actively recruiting banks to sign up and expect leading lenders to join ahead of the September launch, Erik van Doezum, director for metals, mining & fertilizers at ING, said in an email, in response to questions.

The working group led by ING is convened by RMI's Center for Climate-Aligned Finance, and collaborates with the Net Zero Steel Initiative (NZSI), which is part of the broader multi-industry Mission Possible Platform.

Modelled in line with the Poseidon Principles -- the first sector-specific climate-aligned finance agreement for maritime shipping -- Net-Zero Banking Alliance-compatible guidance ensures annual bank-level disclosure. Governance arrangements support implementation, reviews and amendments, RMI said.

RMI said signatories taking up of the framework will allow further development of tools and strategies to benchmark and encourage progress in lowering emissions in steelmaking. Industry and stakeholder group ResponsibleSteel is seeking to certify steel products based on compliance with emissions standards.

"The Sustainable STEEL Principles are not meant to be a static initiative," Van Doezum said. "Post launch signatories will have the responsibility to continue to improve the framework as well as further the dialogue with other initiatives, including ResponsibleSteel."

Citi, ING, and Societe Generale are working on a separate climate-aligned finance framework to support decarbonization of the aluminum sector, RMI said in June. Aluminum's Scope 1-3 emissions vary over a larger range, depending on the source of power and anodes needed for aluminum smelting and emissions upstream in alumina refining and bauxite mining.

By signing up to the framework, participating financial institutions will commit to assessing and disclosing the degree to which emissions associated with loans to the aluminum sector are in line with 1.5 degrees Celsius climate targets.

The aluminum sector accounts for around 2% of global warming emissions, RMI said. The steel industry accounts for around 8% of global emissions, with around two-thirds of steel production currently via the blast furnace route, and the remainder using electric arc furnaces.

Steel benchmarks

The Sustainable STEEL Principles utilizes two benchmarks to measure alignment in progress toward a net-zero steel sector by 2050, to ensure sectoral targets set by banks are consistent with climate targets and provide the granularity to drive client engagement and bolster advocacy along with reflecting a range of decarbonization pathways.

The framework defined a boundary of so-called Scope 1-3 emissions related to crude steel production and crucial raw materials process emissions such as met coke and iron ore pellet production for comparative analysis, without including mining and upstream minerals processing. Banks can use a fallback option of a CO2 data supplier, which uses the same scope and boundary as defined within the framework, to substitute any missing industry emissions data, according to ING.

"The methodology has been carefully designed to provide clear instructions for how to report, both with written guidance and a reporting template for entities asked to report," Van Doezum said. "The methodology isn't anything beyond what might otherwise be reported for Scope 1, 2, or 3 emissions, it is just a slight repackaging intended to improve comparability between steel companies."

Emissions for higher intensity primary iron and steelmaking using fossil fuels and lower intensity production from melting ferrous scrap in electric furnaces are allocated into separate abatement scenarios, rather than a single emissions reduction benchmark.

The bank group expects the framework to support steel industry clients, inject new capital into projects and investments, while tracking banks' lending activities tied to carbon emissions goals.

Attracting and promoting new financing and loan coverage for the steel industry may be key to fund investments in carbon reduction pathways and projects which could boost market availability of lower emissions steel.

Commitments remain strong longer-term around emissions reductions as part of broader policies such as Carbon Border Adjustment Mechanism's application to steel, especially in Europe. Even though higher energy costs and inflation currently grip European markets, which faced declining steel prices over the second quarter and uncertainties from the war in Ukraine.

The SteelZero group, comprising steel users in construction and utility sectors, have made commitments to procuring 100% net zero steel by 2050 at the latest, while auto and domestic appliance groups in Europe are trialing lower-emissions steel to replace existing products as supplies grow.

"Offtakers are uniting in SteelZero and making large commitments for the purchasing of green steel. Financiers are coming together in the Sustainable Steel Principles to start disclosing and therefore paying way more attention to this topic," Van Doezum said. "This, together with the implementation of regulation will in the end drive the interest of steel companies in pursuing opportunities to decarbonize their business practices."