Green steel financing commitments offer a replicable model for climate-aligned finance

By Samuel Kooijmans, Lucy Kessler

Pledges to support the transition to a net-zero steel sector are growing across both the private and public sector. In September, at Climate Week NYC, six signatory banks — including Citi, Crédit Agricole CIB, ING, Société Générale, Standard Chartered, and UniCredit — launched the Sustainable STEEL Principles (SSP), a climate-aligned finance agreement designed to help achieve net-zero emissions in the steel industry. Representing a combined bank loan portfolio of approximately $23 billion in lending commitments to the sector and a market share of over 11 percent of total private sector steel lending, the signatories to the SSP have committed to measure and disclose the 1.5°C alignment of their steel lending portfolios and are encouraged to make climate a part of every steel debt transaction and client conversation.

Additionally, at COP27, under the Breakthrough Agenda, countries representing more than 50 percent of global GDP announced “Priority Actions” to support industrial decarbonization, including a commitment to develop a clear definition of near-zero emissions steel to help direct billions of dollars in investments, procurement, and trade.

Announcements such as these signal both increased scrutiny and rising stakeholder expectations for the steel sector’s net-zero transition. However, more than pledges will be needed to decarbonise this hard-to-abate sector, which accounts for 7 to 9 percent of global carbon dioxide emissions. It will require implementation and action from across the steel industry, throughout the value chain, and from actors spanning the financial sector.

Banks Step Up

While zero-carbon steel is technologically possible, it is more expensive, and relies on technologies which are mostly unproven on a commercial scale. Transitioning the global steel asset base to net-zero-compliant technologies will require an additional $8 to $11 billion in investment annually — equal to $235 to $335 billion of additional total investment by 2050.

Banks — as the major provider of financing to the steel sector — will be a crucial source of the investment needed to reach net-zero. However, financing the deployment of mostly unproven technologies is not a role typically played by large commercial banks. So, although sector-specific roadmaps exist to chart a 1.5°C-aligned course for the sector, and financing is available, the necessary mechanisms must be in place to enable capital to flow accordingly. At this stage, it is up to pioneering commercial lenders, with risk absorption support from multilateral and public institutions, to demonstrate the feasibility of investments in steel decarbonization.

This past October, H2 Green Steel — a Swedish company aiming to build one of the world’s first large-scale green steel plants — received groundbreaking commitments from banks setting the paradigm for transition financing in the steel industry. Half of the signatories to the Sustainable STEEL Principles — ING, UniCredit, and Société Générale — together with two other commercial banks signed a mandate letter for €3.3 billion in senior debtfor the development of the company’s hydrogen-powered green steel plant in Northern Sweden. In doing so, these leading banks have for the first time proven the bankability of green steel projects at commercial scale and paved the way for greater volumes of transition financings.

A Recipe for Success

What was it about the H2 Green Steel project that made these commitments possible? Regional factors, such as Sweden’s access to cheap renewable energy, were certainly important for making the business case. However, outside of the geographic context, there are three primary factors that together can offer a blueprint for financing green steel production going forward:

  1. Proven demand: Green steel is currently more expensive to manufacture than carbon-intensive alternatives, and in the absence of an established market or legislation such as carbon pricing, uncertainty remains regarding the premium that green steel will fetch. Overcoming this uncertainty, H2 Green Steel successfully presold over 60 percent of the planned initial yearly production volume to a network of partners and investors, including automakers and manufacturers, such as Mercedes and Scania. These offtakers gain access to a pipeline of low-carbon steel, necessary to decarbonize their value chain, and H2 Green Steel secured guaranteed demand.
  2. Risk absorption from multilateral and public institutions: The European Investment Bank (EIB), several Export Credit Agencies (ECAs), and the Swedish National Debt Office were key to de-risking these first investments. The EIB approved €750 million in senior debt capital, while the ECAs and the Swedish National Debt Office committed about €2.5 billion in credit guarantees. Credit guarantees, such as these, are critical to lowering the transaction risk and allowing commercial lenders to enter financings which might otherwise not be possible due to credit or jurisdictional issues. Future transactions might also be de-risked through credit insurance or concessional lending instruments.
  3. Support from private financial institutions: The truly pioneering component of H2 Green Steel’s proposed financing, however, was the support from private financial institutions. These banks committed to €3.3 billion in senior debt, demonstrating their willingness to use their balance sheets to support the real-economy’s net-zero transition. Accounting for most of the funding committed to H2 Green Steel, this support will be critical to the ultimate success of the project. To build a business case, lenders had to account for the rapid and significant changes the sector will face on the journey to net-zero. The Sustainable STEEL Principles methodology can equip lenders with the appropriate scenarios, tools, and data to do exactly that.

Sector-Specific Finance Solutions Drive Real Impact

The H2 Green Steel financing is a clear demonstration of how several signatories to the SSP are not only talking the talk of sectoral decarbonisation, but walking the walk, by actively committing to climate financings. Through applying the Sustainable STEEL Principles to measure and report on the low-carbon transition of their portfolios compared to net-zero pathways, these banks can gain crucial insights into their climate progress and build a convincing business case for transition financings.

“While there is still a lot of work to be done, the H2 Green Steel project and proposed financing show both that business cases can be created for steel decarbonisation and that there are financial institutions willing to provide debt funding for the right projects” – Erik van Doezum; ING, Director Metals, Mining & Fertilizers EMEA and Chair, Sustainable STEEL Principles Association

What’s Next: Scaling from Innovative Transactions to Sector Transformation

Nevertheless, the steel sector will not achieve net-zero by 2050 through one-off transactions, or with support from only the banks committed to the Sustainable STEEL Principles. In addition to a rapid buildout of near-zero steel making capacity, the transition of the steel sector will require the retrofitting (or displacement, in the case of a disorderly transition) of every single existing steel asset, necessitating actions from a host of financial actors across the public and private sector.

The first steps have been taken; the way forward has been charted out. The three components that proved successful for H2 Green Steel demonstrate a replicable model for financing future green steel production. The moment has come for banks to implement their commitments to the net-zero transition, establish robust and practical decarbonisation strategies, and ramp up transition financings as has been demonstrated by several of the signatories to the Sustainable STEEL Principles.

This article has been sourced from RMI and can be accessed here.