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The ESG Interview: From Stainless to Sustainable

Hard-to-abate industries such as steel need public sector support to overcome barriers to net zero transition, says Carole Ferguson, Founder of Industry Tracker.

Industry contributes more than a quarter (26%) of the world’s CO2 emissions, according to the International Energy Agency, yet efforts to manage this impact on climate change were largely absent at last year’s COP26 summit.

Carole Ferguson, Founder of Industry Tracker, a research house providing analysis on industrial sectors to help investors make ESG-based decisions, says she “noticed only a few explicit announcements on industrial decarbonisation” at last November’s Glasgow gathering.

There were two announcements from COP26 specifically targeting industrial sectors. The Glasgow Breakthrough Agenda, announced by the UK COP presidency, will report on the state of transition to renewables in the first half of this year and coordinate existing leading initiatives.

The First Movers Coalition, a public-private partnership between the US State Department and the World Economic Forum, commits participating companies to “use their global purchasing power to create new markets for emerging clean technologies”.

Ferguson says there is limited detail in the announcements and more clarity on implementation is needed if “countries and companies are to make meaningful progress” in achieving net zero by 2050.

In particular Ferguson would like to see greater encouragement of public and private sector investment to help industrial sectors go green.

“The Breakthrough Agenda could provide real opportunities to stimulate the public sector funding and support needed to decarbonise industrial sectors,” she says.

Unattractive investments

Industry Tracker, the brainchild of Ferguson and the founders of Carbon Tracker and Planet Tracker, was born out of a recognition that there was a dearth of tangible material for investors wanting to assess emissions from industrial sectors.

Ferguson, who was previously Head of Investor Research at the Carbon Disclosure Project, says: “We wanted to come up with much more in-depth reports, that really provide investors with the necessary data to understand these [industrial] sectors.”

Most recently Industry Tracker released a report on the European steel industry which revealed that the ten largest companies have less than 26% of their carbon budget remaining and “must rapidly shift their business models to reach net zero”.

Further, the report states that while steel production contributes 7-9% of global CO2 emissions, with European emissions from steel accounting for 6%, these companies account for just 1% of the MSCI All Companies World Index.

The steel industry has shown much resilience and flexibility over its history, with new techniques and alloys being introduced to rise to new challenges, such as stainless steel. But today the sector and its investors face an unenviable set of problems.

The mismatch between steel companies’ small market capitalisation and their significant contribution to climate change may make it particularly challenging for investors to influence the industry’s ESG policies and net zero pathways.

Further, Ferguson notes that steel companies do not make attractive investment cases for long-term investors since they are cyclical.

Ferguson says: “Asset owners could be forgiven for looking at the steel industry as a bit of a basket case. If they believe they can time the market, then they might invest in steel for when it is on the top of cycle and very profitable. But the sector is volatile, and they also don’t pay dividends.”

Supply chain focus

However, as the Industry Tracker report makes clear, the impact of steel on portfolio CO2 exposures extends well beyond manufacturers. Being as ubiquitous as it is carbon-intensive, steel can account for a high proportion of the Scope 3 emissions in a broad range of sectors, such as construction, automotive, and machinery, as well as infrastructure for energy, water and sanitation.

Ferguson says this makes steel an important component of the decarbonisation strategies of companies and economies.

“We need to look beyond the steel companies. Steel filters down into all the other industries and is critical to the climate change debate.”

Industry Tracker’s assessment of the largest steel companies in Europe makes for grim reading. It says these companies will need to “stop renewing blast furnaces before 2030 and have between now and 2033 to begin investing in new technologies, like green hydrogen steelmaking”.

The cost of moving to more renewable approaches and ditching the blast furnaces which Ferguson says are the biggest CO2 contributors is estimated at between US$4-34 billion. The cost to each company depends on the size of their asset base and the extent to which they have already invested in green technology.

Yet the Industry Tracker data suggests the top steel companies are investing next to nothing in research and development for low carbon technologies. Overall, the average R&D spend as a percentage of sales from 2018-2020 was just 0.5%, with Evraz, Metinvest, Severstal admitting a zero spend in this area.

Ferguson suggests that the steel industry is the victim of geo-political tensions which sees it charge far less than it should for a critical and strategically significant product.

“Companies need to charge more for steel. The sector has been politicised after China flooded the markets with cheap steel, which drove the US government to impose tariffs on imported steel. Without charging enough there can’t be the resources to pay for innovation and cleaner practices,” Ferguson says.

Disruptive influence

To help with the budget constraints, Ferguson points to collaborations between other industries and their steel suppliers to drive green innovation.

For example, last October Sweden-based car firm Volvo announced a deal with steel manufacturer Ovako which is furthering the use of fossil fuel-free steel. Volvo will use the surplus green hydrogen produced as part of Ovako’s operations to power the car manufacturer’s fuel cell vehicles.

Ferguson predicts that more of these collaborations will come into play as consumers and those further down the supply chain demand fossil fuel-free steel.

And such partnerships alongside more private finance and public policy support will be critical since – given the parlous state of steel companies’ current balance sheets and free cash flow yields – they simply cannot afford to transition alone.

Yet the fight to attract such investment and collaboration is made all the harder for traditional steel companies by the advent of H2 Green Steel (H2GS). A Swedish enterprise, H2GS is a new steel company targeting green steel production by 2024, with an ambition to produce five million tonnes by 2030. Industry Tracker says H2GS will be using hydrogen-fuelled technology and leveraging this across the value chain.

While Ferguson says there is growing evidence that leading steel companies are developing transformative technologies that “could realise near-zero carbon transition routes for primary steel production” by 2050, she describes steel as something of a ‘problem child’ on the path to net zero.

“These companies must break away from their capital-intensive business models and build on the momentum that exists in the move to new green technologies particularly green hydrogen. However, this can only happen with public sector support, cross-sector partnerships and greater private investment.”

 

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