How investors plan to address the steel industry’s ‘methane blindspot’

It is hard to imagine the energy transition progressing without materials that are currently hard to abate. Steel - the world’s most commonly used material – is a prime example.

Think wind towers, grid networks, solar farms, electric vehicles and battery storage sites. Many of the technologies that power the energy transition quite literally have nerves of steel.

Conversations over the emissions intensity of steel have historically focused on operational carbon dioxide emissions. Fidelity International, a global asset manager with $862bn under management, is of the view that this ignores a more concerning risk factor – methane.

Citing asset owner demand, Fidelity International’s Australian offices are now piloting a new systems level approach to address the investment risk of methane in steel value chains.

Sue Lyn Stubbs, associate director, sustainable investing at Fidelity International told Net Zero Investor more about the new approach which includes a collaboration with Aware Super and Royal London Asset Management.

Methane materiality

The financial materiality of methane, Stubbs notes, is tied to its warming potential. Over a 20-year period, methane’s warming potential exceeds that for carbon dioxide by a factor of 84. However, it does not stay in the atmosphere for as long as carbon dioxide does.

“This means cutting methane emissions can lead to immediate climate benefits, making it one of the most effective short-term climate interventions available. For investors with climate goals, this presents a great opportunity”, she says.

Methane emissions in steel value chains have to do with the use of metallurgical coal, a critical input for a majority of steelmakers. “The combination of steel’s economic importance and the methane intensity of metallurgical coal create a complex investment risk”, Stubbs notes.

Stubbs notes that tightening regulations such as the EU’s methane monitoring requirements and Australia’s Safeguard Mechanism have created cost pressures in steel supply chains. Combine that with tight margins at steel mills and the financial materiality of methane becomes increasingly evident.

“We're really focused on methane from metallurgical coal because it's a significant but often overlooked climate risk. Financially, methane emissions are becoming more relevant for carbon pricing, stakeholder expectations, and access to capital”, Stubbs explains.

Blind spot

Historically, Stubbs says, methane’s financial materiality was overlooked in steel investing. She refers to this as the ‘methane blind spot’.

Most investors tend to focus on direct operational emissions from steel – which account for about 8% of global GHG emissions. “When you incorporate methane emissions from the extraction of metallurgical coal, the proportion of lifecycle emissions jumps up to 27%”, says Stubbs.

The methane blind spot also accrued from several years of data limitations. Underreported emissions data combined with less than ideal measurement techniques and corporate carbon accounting that ignored methane added to the invisibility of methane’s financial materiality.

“It's like trying to drive with a foggy windscreen”, Stubbs commented.

Even investors concerned about methane have almost entirely focused their efforts on oil and gas – the largest industrial source of methane in most countries. For countries such as China and Australia (which Fidelity’s approach focuses on), this is not the case - steel’s contribution to methane in these countries, is far larger.

“So, getting a grip on methane emissions with reliable data is a significant step towards managing the investment risks associated with it”, she says.

Investment implications

For investors looking to allocate capital to steelmakers or miners in their supply chains, a balancing act awaits.

“For investors, this presents a balancing act between supporting the clean energy transition and addressing immediate environmental concerns. Steel is indispensable; we need it for development and renewable generation”, says Stubbs.

Divestment from steelmakers, she notes, is unlikely to hold the key. Another avenue for investors is to support the development of green steel technologies. However, Stubbs warns that these technologies are promising but are far from silver bullets.

“These green steel technologies come with their own challenges, such as high initial costs and technological uncertainties. Plus, recent announcements from several major green steel players indicate that scaling and commercialising these technologies is taking longer than initially expected”, she explains.

Systems level approach

In listed equities and fixed income, asset classes where Fidelity’s focus rests, Stubbs advocates in favour of a systems-level approach.

“The idea emerged during brainstorming sessions with an asset owner client, who mentioned their members were eager to tackle methane”, Stubbs says.

Explaining the approach, which focuses on the Australian market for now, Stubbs said, “After thorough research and stakeholder mapping, we identified three pillars for the systems-level initiative: corporates, policymakers, and innovation and funding players”.

The pilot approach is being implemented in collaboration with Australian superannuation fund Aware Super and Royal London Asset Management. The idea is to simultaneously invest in innovative technologies for methane abatement, engage miners and steelmakers for greater transparency and convince policymakers that they have a role to play too.

The result is the deliberate and delicate framing of methane as a systemic risk. This, Stubbs says, is what Fidelity’s approach offers to asset owners.

“For asset owners like Aware Super, this approach adds value by providing a comprehensive framework to address systemic risks”, she concludes.

For both investor awareness over methane’s financial materiality and Fidelity International’s pilot approach to address it, it is still early days. Regulations are tightening and data visibility is on the rise.

In the near future, methane might finally occupy its rightful spot in investors’ risk assessments. If and when it does, approaches such as this one, would have had a role to play.