How China’s steel mills are turning to new bonds to fund their green transition and net-zero goals
- Trillions of dollars are needed for Chinese steel mills to transition, amid rising cost pressures and tighter bank loans
- Other than green bonds, mills are also turning to sustainability bonds and ‘transition bonds’ for projects that green bonds cannot finance
China is the world’s biggest producer of steel, an industry that is not only one of the most polluting in the country, but also a major energy consumer and carbon emitter globally.
In China, the industry accounts for about 11 per cent of its energy consumption and 15 per cent of its carbon emissions. Every tonne of crude steel produced in China, which accounts for more than half the world’s output, also produces nearly 2 tonnes of carbon dioxide – a carbon emission intensity second only to India’s.
Although China’s crude steel output has been falling – by 3 per cent in 2021 and a further 2.1 per cent last year – only about a tenth of it is produced by the more environmentally friendly electric arc furnaces.
Policymakers, investors and steel companies are grappling with the challenge of how to use low-carbon transition finance tools to bridge the funding gap and enhance competitiveness. They must also ensure that companies follow a reliable and scientifically supported transition path while avoiding the risks associated with transitioning too slowly or rapidly.
As a result, steel companies are increasingly turning to external financing, such as issuing bonds, to fill the gap in funding their transition.
Although these international transition finance standards provide guidance for transition activities and financing, there is still a need for discussions on the improvement of standards, including for performance indicators, disclosure requirements and verification requirements, and specifically in the context of the steel industry.
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These standards reflect the need to develop climate transformation strategies, set scientific emission reduction goals and establish technological pathways to achieve them. Companies should ensure the proper collection of data and information to prepare for subsequent disclosure and verification efforts.
The low-carbon transition is integral to China’s steel industry’s market development goals. Under China’s previous 13th five-year plan for 2016-2020, the industry had to meet targets aimed at reducing excess capacity, transition to ultra-low emissions, and promote energy conservation and emissions reduction.
The financing focus was on reducing the corporate asset-liability ratio and supporting green development through innovative financial instruments. Steel companies also carried out energy-saving and environmental protection plans through process transitions and product upgrades.
In the race for transition financing, steel enterprises should be proactive – in establishing diversified financing channels, designing scientifically reliable low-carbon transition goals and road maps, and engaging in carbon emissions accounting and management. By doing so, they can gain a competitive advantage in the net-zero race for a future with “zero-carbon” steel.
Lauren Huleatt is program manager and investor lead at Transition Asia