Few materials are as emblematic of economic progress as steel, an essential component of soaring skyscrapers, complex transportation systems, and massive bridges. The metal also has a considerable role in the renewable energy ecosystem, from towering wind turbines to bottom-feeding tethers for tidal power generators.
But converting iron ore into steel is incredibly energy intensive, and the environmental impact of steel production has recently drawn attention from impact investors, large institutions, and other climate-aware organizations.
Steelmaking Remains a Carbon-Laden Process
The Belgium-based World Steel Association reports that 1,808.6 million tons of crude steel were produced globally in 2018. The process of converting iron ore into steel requires temperatures of up to 1,700 degrees Celsius. Due in large part to the chemical reactions inherent in steelmaking, every ton of steel produced releases 1.83 tons of carbon dioxide. In 2018, that translated to roughly 3.3 million tons of carbon dioxide, or between 7 and 9% of the world’s carbon dioxide emissions.
Steelmakers use one of two approaches to manufacture steel products. Accounting for 67% of the world’s steel production, the basic oxygen furnace (BOF) method uses coal-reliant, high-temperature blast furnaces to liquify iron ore and remove impurities as it’s converted into steel. The other third is produced in electric arc furnace (EAF) systems, which melt recycled scrap steel in mini-mills that require less energy to operate.
The industry points to advances in reducing production-related energy demands, managing wastewater, channeling waste heat as an energy source, and recycling initiatives. Still, steelmaking’s carbon footprint remains a concern for investors—especially as leaders like Carol Cowan, senior vice president of Moody’s Investors Service, predict that the technologies being developed to slash carbon emissions are so cumbersome that they’re “unlikely to gain widespread adoption in the next 10 years.”
Major Investors Raise the Bar
As the Paris Agreement encourages reducing greenhouse gas emission “as soon as possible” to keep global warming below 2 degrees Celsius, a collection of impact investors recently banded together to define the steel industry’s charge. In February 2019, the Global Investor Coalition on Climate Change, a collaboration of four organizations comprising 250 major institutional investors and overseeing $30 trillion in assets, called on the world’s steelmakers to dramatically reduce their carbon emissions.
In Investor Expectations of Steel Companies, a report published by the Institutional Investors Group on Climate Change, the consortium urged its members to engage company boards and management to ensure the development of strategies for addressing climate-related risks and the implementation of accountability measures. It also looks for steel companies to enact measures to cut greenhouse gas emissions throughout the value chain and commit to a level of disclosure that will allow investors to gauge the success of such efforts.
At a minimum, the high-powered investor group is pushing for the 31% cut in emissions by 2050 promoted by Science Based Targets. The fight to reach that goal relies heavily on shareholder resolutions such as the ones filed with AK Steel Holding Corporation and United States Steel Corp. in 2018 that pressed the companies to adopt targets for reducing greenhouse gas emissions and report on plans to achieve these targets. Shareholders withdrew both when each company’s management team committed to adopting the proposal.
The Industry Faces Risks
In addition to shareholder pressure, steelmakers face a series of climate-change–related risks. In terms of technology risks, BOF producers could see the EAF process, which may more easily tap renewable energy sources, as a threat. Policy risk could come in the form of a carbon tax, already implemented in some countries, which could reduce steelmakers’ already slim profit margins. And the many customers who have begun to opt for alternative materials that make a smaller mark on the environment represent a market risk for steelmakers.
The industry is exploring innovative ways to reduce carbon dioxide emissions—although as Moody’s noted, none of the solutions is close to being ready for widespread adoption. Nonetheless, some promising technology has emerged, including:
- Methods that substitute hydrogen for carbon in processing iron ore
- Carbon capture and storage
- Carbon capture and utilization
- The substitution of biomass for coal
- A new approach to processing iron ore with electricity
To fuel the carbon-reduction drive in the United Kingdom, three universities and five steel companies unveiled the SUSTAIN Manufacturing Hub earlier this year. Working from a £35 million investment, the initiative focuses on steel production, capturing emissions, reusing waste, and developing new products with the goal of a carbon-neutral iron and steel industry in the UK by 2040.
Broad progress is far from guaranteed: although the highly regarded ultra-low carbon steelmaking (ULCOS) program completed testing and pilot phases with a broad spectrum of EU partners between 2004 and 2015, its most promising results still require deeper research to overcome technical difficulties, as well as significant governmental backing. Ultimately, the scope of the transition required to improve the environmental impact of steel production means that institutional investors with a long-term mind-set are likely the best positioned to push for systemic change in the industry.