Investor appetite for green steel is growing

The ubiquitous nature of steel is hard to ignore. From transport and infrastructure to construction and machinery, steel is the world’s most widely used material. Over the years, steelmaking has undergone a few changes. Technology and geography are key amongst them. 75% of today’s steel grades did not exist 20 years ago and currently more of it is made in China than anywhere else in the world.

Importantly, steelmaking remains a capital and emissions-intensive process. Every ton of steel, produces 1.4 tons of carbon dioxide - a number that has stagnated since 2010. The stagnation has earned steelmaking its identity of a hard-to-abate industry. Yet, its abatement remains critical to global decarbonisation.

“Innovative technologies for primary steel production need to be deployed at commercial scale before 2030”, warns the International Energy Agency. Doing so would require buy-ins from patient financiers, which depends in no small measure on the financial viability of “green” steel.

New research from the Australasian Centre for Corporate Responsibility (ACCR), a shareholder advocacy group, suggests that investor confidence in green steel is rising.

What is green and what isn’t

Hitherto, the key challenge for green steel has been its definition. The ACCR research, which surveyed 500 respondents across 34 countries and nine types of financial institutions, found that investors agree on what green steel is and more importantly what it is not.

81% of investors agree that green steel cannot be produced with fossil fuel-based inputs such as metallurgical coal. The definition of green steel that investors are willing to finance includes the use of renewable energy and green hydrogen while rejecting the use of natural gas and offsets.

Investor conviction

For steelmakers, dependence on fossil fuels has to do with a critical input in steel production: metallurgical coal. Producing a ton of steel, needs some 770 kgs of coal. The ACCR survey asked investors whether they saw metallurgical coal as a necessary component of steelmaking going forward – 68% disagreed.

“With the vast majority of investors surveyed predicting a transition away from the use of metallurgical coal in steelmaking, it’s clear that fossil-fuel free projects are viewed as a safe, long-term prospect for shareholders”, says Fiona Deutsch, company strategist and lead analyst at ACCR.

This investor conviction over the technological alternatives to coal, varies by region. It is of particular importance in China – which produces 53% of the world’s steel. Crucially, 72% of respondents in China did not agree that the industry will need to rely on coal in the future.

Moving away from metallurgical coal however, requires significant renewable energy capacity. Investors view this as a major headwind for green steel. Even in China, 63% of investors agree that there is not enough renewable energy available to decarbonise steel production.

The hurdle investors say, is not insurmountable. Most investors (59%) view importing green iron as a viable alternative.

Financial risk

The survey also painted a picture of the financial risk of metallurgical coal and the steelmaking that proceeds from it. Surveyed investors reported two key sources of risk – reputational damage and stranded assets.

43% of investors identified reputational risk as a factor driving their investment decisions in the mining industry that feeds inputs into steelmaking. Additionally, investors reported that the reputational damage from investing in coal-based steel production outweighs its financial benefits.

Investors also foresee stranded asset risk from metallurgical coal mining. Despite this, ACCR’s research found the majority of investors at institutions managing between $100m - $499m are yet to assess this risk in detail. At larger institutions which manage over $10bn, this practice was more commonly reported.

The ACCR survey finds evidence of cautious investor optimism surrounding the green steel proposition. Investors seem convinced that decarbonising steel is not only possible but also financially prudent.