AIQ: Cleaning up capitalism

The going gets tough

Can heavy industry decarbonise?

Heavy industry and heavy transport are hard to decarbonise, but this must be done to reach net-zero emissions by 2050. Can companies, policymakers and investors join forces to make it happen? The race is on…

The clock is ticking, and if we don't halve emissions by 2030, we won't ever get to net zero. We must go all-in for 2030

2030 is less than nine short years away. Making a meaningful dent in greenhouse gas emissions is within the mandate of most CEOs and government leaders, who can no longer leave it to their successors to resolve.

“It’s great that CEOs have committed to net zero, but they now need to take the actions necessary for their companies to be able to get there, and they need to start today,” says Mendiluce. “The thing no one has yet realised is that this is massive.

“The fact that the US has a 55 per cent emission reduction target in the next nine years is going to transform all industries, and the hard-to-abate sectors are a very important part of it,” she adds. “They might not be able to completely halve their emissions because some of the technologies need to be developed, but they need to get close; if they don’t start today, they will not get to net zero.”

According to the World Economic Forum (WEF), heavy industry and heavy-duty transport are responsible for nearly a third of global carbon dioxide (CO2)emissions, a share that will double by mid-century unless action is taken.1 From steel to cement, plastics to transport (for global supply chains), these sectors are deeply embedded in our economies, and demand in developing countries is projected to grow significantly over the coming decades.

Figure 1: Global annual plastics production could increase by up to 150% by 2050
Global annual plastics production could increase by up to 150% by 2050
Source: Material Economics, Energy Transitions Commission, 2018

As they are so necessary, we must find ways to decarbonise them, but they are 'hard to abate'. In other words, the technological solutions needed to reduce their emissions are either in their infancy or more expensive than in other industries. Developing technologies like carbon capture, use and storage (CCUS) or green hydrogen on a commercial scale will require huge upfront investment.

Can industries, their customers, governments and investors join forces to reduce the risk, scale up innovative low-carbon options at pace and replace existing carbon-intensive assets in time?

Figure 2: 84% of emissions from steel, cement, plastics and ammonia are hard to abate
84% of emissions from steel, cement, plastics and ammonia are hard to abate
  • Electricity: Production of 213 TWh to serve industrial processes
  • Low- and mid temperature heat: For e.g. plastic polymerisation and processing
  • End-of-life treatment: Carbon built into the plastics is released when plastics is incinerated at the end of life 
  • High-temperature heat: 1100-1600°C for core processes of melting and forming steel, steam cracking, and clinker production
  • Process emissions: From carbon used as an integrated part of the process chemistry of materials production, e.g. carbon used in reduction of iron ore, calcination of limestone, and hydrocarbons in fuel-grade by-products in steam cracking
Note: 100% = 536 Mt CO2 (total 2015 CO2 from these industries).
Source: Material Economics, 2019

Assessing the challenge

“Harder-to-abate heavy industries have traditionally been seen as too difficult technologically, too expensive, and perhaps too critical for other needs in terms of employment or infrastructure,” says Robert Watt, communications director at the Stockholm Environment Institute (SEI) and head of partnerships at the Secretariat of LeadIT.2 “It's not that people aren't aware of the emissions associated or that they don’t want to do anything about it but, previously, there was a feeling the moment wasn't right.”

Heavy transport, aviation and shipping together account for around 10 gigatonnes (Gt), or around 30 per cent, of total global CO2 emissions, but if current trends continue they could account for 16Gt by 2050 and a growing share of remaining emissions as the rest of the economy decarbonises.3 In addition, while most sectors can decarbonise by switching their power source to electricity, in heavy transport and heavy industry it is either very hard or meaningless.

“Producing cement is a chemical process in which you take calcium carbonate and you make it into calcium oxide. That chemical process produces CO2, so even if you only use electricity to produce heat for it, it doesn’t provide the answer,” says Lord Adair Turner, chair of the Energy Transitions Commission, a think tank focusing on economic growth and climate change mitigation.

“Similarly, it may be possible in the very long term to use electricity to turn iron ore into pure iron, but for the moment you need a reduction agent such as coking coal,” he adds. “In aviation, we will be able to electrify short-distance aviation, but today a battery would be far too heavy to get a jumbo jet across the Atlantic. Essentially, with hard-to-abate sectors it will either take us a long time to electrify or the route to decarbonisation has to be something other than electrification.”

Sora Utzinger, senior ESG analyst at Aviva Investors, says the core of the issue is the substitutability of current raw material inputs because the energy density balance of fossil fuels remains far superior to low-carbon alternatives.

We haven't quite figured out how to power transcontinental flights or transoceanic shipping with low-carbon renewable sources

“We haven't quite figured out how to power transcontinental flights or transoceanic shipping and other industrial heavy lifting with low-carbon renewable sources,” she says.

Utzinger explains the storage to bridge the energy density gap and supporting distribution infrastructure are still works in progress that require high upfront investment to develop, while governments must also think about the additional energy demands on current systems if all hard-to-abate sectors were to transition. Power sources will face capacity constraints as the world electrifies.

Malini Chauhan, ESG sector analyst at Aviva Investors, adds companies in the chemical sector consistently struggle to set scope 3 emissions targets because their supply chains are so broad and globalised. “The companies are having difficulty getting their full emissions profile data, and I suspect their suppliers would need help,” she says.

Betting on the right horse

Because the technologies are at such an early stage, it creates uncertainty for companies in terms of choosing the right option.

“In my experience speaking to companies like BHP on their emissions reduction trajectory, they've been coy about making outright commitments because they are sitting on the fence in terms of specific technology bets,” says Utzinger. “They are between a rock and a hard place. On the one hand, they have a clear idea of how they want to decarbonise their own operations, but with respect to scope 3 it is so technology dependent that they have not been able to make the types of commitments we are seeing in other sectors like oil and gas, which has been able to look back on a much richer history of renewables.”

Companies are trying to identify which technology will eventually emerge as the most efficient to scale up

While policy guidance and support are necessary to create a level playing field and give direction, it may still not be enough. Some companies are entering into partnerships and exploring various technological options to identify the ones that will eventually emerge as the most efficient to scale up.

“If we look at steel, all the large players are exploring different options,” says Antoine Chopinaud, credit research analyst at Aviva Investors. “Arcelor alone probably has four or five different projects running that use different sets of technologies because, although it is committed to 2050 net-zero targets, the way to meet them is uncertain.”

Until the way forward becomes clear, many firms’ net-zero plans remain heavily reliant on carbon offsets.

Assets: Live long, and fester

Another difficulty is that the lifespan of assets in these industries is extremely long. From foundries to aeroplanes, iron-ore mines to cargo ships, anything built today is likely to still be in operation in 2050.

“There are big sunk costs, and that is one of the difficulties about making a transition,” says Watt. “In some sectors, they have just reached that tipping point where they need to think about reinvesting. They can either reinvest in carbon-emitting technologies or in a decarbonised process.”

Watt explains this also differs from place to place, with many steel plants in Europe and parts of India coming to the end of their life, while in other areas of India some private companies’ steel plants are quite modern but still using coking coal.

“2050 is only one investment cycle away, and new low-carbon technologies would have to reach a commercial threshold by the end of the decade to really make a meaningful impact,” says Utzinger. “Otherwise, we risk being locked into a higher carbon emissions pathway for two to three decades.”

Leading companies are making commitments that will drive change

Turner says the good news is that we are already beyond tipping points in terms of ambition and commitment. “If you look across hard-to-abate sectors, leading companies are making commitments that will drive change. Arcelor Mittal, the second biggest steel company in the world, and Maersk, the biggest container shipping company, say they will be net zero by 2050. Aviation companies are beginning to make serious commitments regarding the pace at which they will reduce emissions. Truck providers like Volvo have said that by 2040 they will only be selling zero-carbon trucks, and primarily battery electric fuel-cell trucks. As a result, there is also commitment to the early stages of new technology,” he says.

“It will take a long time to work through the capital stock and turn it over, but it's a revolution in the level of commitment,” he adds. “We have clarity on what the major technologies probably are, and the first orders are coming in.”

Dependencies and infrastructure

One stumbling block is that decarbonising these sectors cannot happen one foundry or aircraft at a time. The sectors are embedded in a whole network of suppliers and infrastructure, all of which must be transformed.

“It is a physical dependence in that you need access to ports, pipelines, electricity grids, or other kind of infrastructure,” says Max Åhman, associate professor of environmental and energy systems studies at Lund University in Sweden. “These industries need to develop long-term plans for where they want to go, and that must include infrastructure.

“That is usually in the realm of governments: maybe not to build everything, but at least to plan and grant permissions, in some areas more than others. Gas pipelines are typically well planned and often have geopolitical implications, especially when they cross borders, whereas ports are more locally planned and built on demand,” he says.

He explains that because the industry players typically sign long-term contracts to use the infrastructure, which contribute to their financing, negotiating early breaks will be an issue. “The next ten years are a problem,” he says. “The contracts are in place; they're not that easy to evade, and they will make it difficult for the transition.”

Governments need to be proactive and start planning as part of their net-zero commitments

Governments therefore need to be proactive and start planning as part of their net-zero commitments. Much of the current energy infrastructure was built through central government planning, and similar decisions need to be made now for the future. Åhman explains the Central European gas infrastructure, for instance, can be partially repurposed for hydrogen, something for which European gas grid operators have begun planning.

“Existing fossil-based infrastructure is a physical lock-in; to move to something else, we need another kind of infrastructure based on renewables,” says Åhman. “That has to be planned and built or repurposed, and governments can create opportunities, ensuring it runs smoothly. In turn, businesses can also plan and start putting in orders. That's how to break the dependencies. These are huge investments and you need certainty.”

From a societal perspective, the jobs transition dimension is also a crucial dependency that should not be forgotten. “There needs to be a way for this to work for both companies and societies. It can be solved, but it is a big extra challenge,” he says.

Yet without these changes, CO2e emissions from heavy industry alone would remain above 500 Mt a year.

Figure 3: Steel, chemicals and cement emissions in a baseline scenario (Mt CO2/year)
Steel, chemicals and cement emissions in a baseline scenario
Source: Material Economics, 2019

The good news is it is technically possible to decarbonise all harder-to-abate sectors by mid-century at a total estimated cost of well under 0.5 per cent of global GDP. That is a positive starting point.4

Technical solutions exist

Some of the technical solutions are still hotly debated and unproven, particularly at commercial scale. But technological breakthroughs could be a huge driver to transition hard-to-abate sectors more quickly and cheaply.

Figure 4: Breakthrough innovation could accelerate full decarbonisation

Breakthrough innovation could accelerate full decarbonisation

Source: SYSTEMIQ analysis for the Energy Transitions Commission, 2018

“For flights, the current expectation is that a lot of shorter-distance trips may electrify,” says Turner. “Optimists would say that by 2035 we'll have planes coming out that could fly 1,000 kilometres and 100 passengers but, at the moment, nobody is assuming that we will get batteries light enough to fly a plane across the Atlantic.”

However, he is confident hard-to-abate industries can be decarbonised even with only those technological improvements that are already well under way, and relatively predictable.

“We are very confident we can get the ‘EBIT’ sectors – energy, buildings, industry and transport – to around net zero by mid-century with technologies that already exist,” he says. “Some need to be scaled up and cost reduced, but we don't need to develop entirely new things.”

Three areas, six innovations

Research shows that in addition to technologies such as hydrogen and carbon capture, materials efficiency, energy efficiency and a more circular economy are essential to reduce costs and achieve full decarbonisation.5

Companies should ask where they need to be ten years from now, 20 years from now

“A good way for companies to look at this is to ask where your company and industry will need to be ten years from now, 20 years from now, and how you build your transition journey from a wide base of solutions because then there is a lot of value to transition solutions, incremental improvements and so on – low-hanging fruit,” says Anders Åhlén, associate partner at Material Economics, a consultancy firm advising businesses on how to reduce their environmental footprint.

“All companies should go after those,” he adds. “It will take time before more novel solutions are commercialised, so we need to have a parallel approach of bending the curve now to get emissions down with things like energy and materials efficiency, switching to low-carbon fuels like biofuels where possible, electrifying parts of your processes that are easier, and developing circular offerings.”

Figure 5: A more circular economy can cut hard-to-abate emissions by 40 per cent by 2050 (Gt CO2 per year)
A more circular economy can cut hard-to-abate emissions by 40% by 2050
Source: Material Economics analysis for the Energy Transitions Commission, 2018

Mendiluce says this entails innovation in six major areas.

“The first one is materials efficiency and circularity,” she explains. “This is about improving product and equipment design, and materials, processes, systems. Sorting out traceability and recycling is very important. In some of these products, like plastics, the collection infrastructure is not fully in place, especially in developing countries, and plastic leakage is having major impacts on the environment.

“Efficiency means less cost for companies. A circular economy can also create new revenue streams from the reutilisation of waste that would otherwise end in landfill,” she adds.

Figure 6: Why energy efficiency and demand management matter
In the harder-to-abate sectors, energy efficiency improvements and demand management can:
Reduce CO2 emissions:
Reduce CO2 emissions
Reduce cost:
Reduce cost
Reduce the scale at which decarbonisation technologies need to be deployed:
Reduce the scale at which decarbonisation technologies need to be deployed
Source: Material Economics analysis for the Energy Transitions Commission, 2018

Mendiluce lists electrification and hydrogen as the second and third innovation areas, which are going in the right direction. “We also need to develop electric furnaces for cement and chemicals, and the electro-chemical reduction of iron, so electrification is really important – with renewables, of course,” she says.

Figure 7: Three steps to a net-zero economy

1. Use less energy

- Deploy more efficient equipment, transport modes and production processes

- Use less primary material input to deliver the same goods

- Change consumption patterns using fewer products and services to achieve same living standards

2. Scale up clean energy provision

- Multiply by 10-15 zero-carbon electricity generation

-Scale up zero-carbon hydrogen production to reach 700-1,000 Mt p.a.

- Build biofuel and synthetic fuel supply chains

3. Use clean energy everywhere

- Drive massive clean electrification of buildings, transport and industry

- Use hydrogen where you can’t electrify

- Decarbonise remaining energy use using CCS/U and sustainable bioenergy

Source: ‘Making Mission Possible’, Energy Transitions Commission, September 2020

The fourth is biochemistry and synthetic chemistry, where interesting things are beginning to happen, although more progress is needed. New materials are the fifth area of innovation. “It is really interesting to see some substitutes for coal and cement, as well as new bioplastics,” she says.

Last but not least is CCUS.

Estimating the cost of decarbonisation

There is a lot of debate at the moment on the social impact of decarbonisation, as the added costs are likely to be passed on to end consumers.

The majority of the associated costs in aviation will be passed through to customers

“If you look at aviation, they have been trying to be more stringent on carbon control but the majority of the associated costs, especially in Europe, will be passed through to customers,” says Cristiano Mela, credit research analyst at Aviva Investors. “This raises questions about the viability of their long-term strategy because the transition will basically be implemented through the end customer paying a higher price.”

The good news is that while cost increases are considerable in some cases like aviation, most price increases for end customers look like they will be negligible.

“We have looked at the numbers very carefully and have examples showing that for the end products for a customer – a car or a plastic bottle, a building and so on – the cost increase does not have to be high, in the order of one per cent. So from a societal perspective, there is not that much cost,” says Åhlén.

Figure 8: The cost to consumers of decarbonising hard-to-abate sectors will be small
Heavy industry:
Heavy industry
Heavy-duty transport:
Heavy-duty transport
Source: ‘Making Mission Possible’, Energy Transitions Commission, 2018

“But the cost increase in the B2B part of the value chain is very high, so that's the really big challenge for the industry, especially for the first tonnes produced with breakthrough technologies, as well as the transition’s effects on jobs – reskilling and in some cases relocation,” he adds.

Abatement costs will be more moderate in heavy industry and decline in the longer term as technologies come to maturity and scale

On the production side, the cost of decarbonisation will vary by sector. Research commissioned by the Energy Transitions Commission found that abatement costs will be more moderate in heavy industry and decline in the longer term as technologies come to maturity and scale.

They may range from $25 to $60 per tonne of steel, and from $120 to $160 per tonne of cement. The cost would remain higher for plastics – over $200 per tonne excluding a switch to renewable feedstocks, and this is where materials efficiency and recycling will have a crucial role.

The same report found that for long-distance shipping and aviation, abatement costs will remain significant even in the long term, up to $180 per tonne of CO2 for aviation and $300 for shipping.6

Figure 9: The costs of supply-side decarbonisation vary greatly by sector (US$/tonne CO2)
Industry:
Industry
Transport:
Transport
Source: ‘Making Mission Possible’, Energy Transitions Commission, 2018. Data sources: Industry: McKinsey & Company; Shipping: UMAS analysis for the Energy Transitions Commission; Other transport: SYSTEMIQ analysis for the Energy Transitions Commission, all as of 2018

In each sector, the most cost-effective route to decarbonisation will likely vary by location, depending on the availability of resources. In particular, the choice between electricity based, biomass and carbon capture options will be strongly influenced by the price at which zero-carbon electricity is available locally.

In sectors exposed to international competition, we need to create a level playing field

“The geopolitical picture used to be about who had the oil,” says Julie Zhuang, global equity portfolio manager at Aviva Investors. “Now, it’s the opposite. It's about who’s got the sun, the wind, the hydro.”

However, Mendiluce says most of these routes will incur more cost, which will vary by location, and carbon markets alone will not drive progress. “We need strong policies that create incentives in these industries,” she says. “In sectors exposed to international competition, we need to create a level playing field, so that we incentivise all players to embark on the transition.”

Utzinger agrees, explaining that if we are serious about decarbonising hard-to-abate sectors, a global industrial policy is needed. “At the moment, there is no hint of that,” she says. “At the recent G7 meeting [held in Cornwall, England, in June 2021], no serious steps towards climate change were made despite the headlines. That does not bode well for COP26.”

Zhuang believes setting a realistic price for carbon will be critical. “Maybe we are wrong to say the technologies are very expensive; they just seem expensive because we are not pricing carbon properly,” she says. “If governments imposed a carbon tax, a lot of these technologies would suddenly make sense economically.”

Joining forces

Building a zero-carbon economy by mid-century will require a dramatic acceleration in the pace of investment. While it is affordable, it will not happen unless countries set clear targets, design policies to support key technology developments, price carbon, drive energy efficiency and ensure key infrastructure developments.

Some investments will be made at government level, such as certain parts of infrastructure, but much will depend on companies. For them to be able to make decisions to invest millions into each plant, they need to find a business case that can work, for themselves and their customers.

“There are a number of risks in these investments,” says Åhlén. “They are usually large, one-off investments. There is the technology risk: are we betting on the right horse? There is also an issue with the costs of ramping up, in that producers must bear a lot of costs in the beginning but only get paid later, when they start producing the materials at scale.

The greater customers’ commitments to buy net zero, the easier it becomes for producers to make the necessary investment decisions

“Then, there is a big market risk,” he says. “Will there be a market for more expensive steel, cement, plastics, fertilisers when you start production? Many companies on the demand side are setting net-zero targets, but it is hard to know for certain they will be willing to pay a sufficient green premium for products.”

Finally, if competitors don’t move at the same pace, their cost base will remain lower, adding to the market risk for first movers.

This is why demand is crucial: the greater customers’ commitments to buy net-zero steel, cement or plastics, the easier it becomes for producers to make the necessary investment decisions. Offtake agreements in particular can make a significant difference.

One element that can support demand is the ability to translate slightly higher prices into an attractive end-consumer promise, such as living in a net-zero building or, for a freight company, buying net-zero trucks that don’t just run on electricity but are also made from net-zero steel.

“It’s important to understand the best total business case. Policy support is important, but the demand side also needs to help and can gain a strategic advantage,” says Åhlén. “For example, steel producers can't be experts on how carmakers can market a car with low-CO2 steel in the best way. Understanding how customers – e.g. carmakers – can get the highest benefit out of the end product at the lowest cost is part of the business case and there is much potential in strategic collaboration between steelmakers and their customers.”

However, the ability to turn this into attractive propositions depends on the sector. “If you take retail, all their shipping costs a tiny bit more,” says Turner. “Because it's spread across everything, it's more difficult to turn it into an advertising advantage with customers. Saying, ‘Come to my store because the shipping is zero-carbon’ is a tricky thing to turn into a compelling customer proposition.”

Coming together

Coordinating the moving parts of value chains is essential and at the heart of some of the most influential initiatives to decarbonise hard-to-abate sectors, such as the Mission Possible Partnership, the UN’s LeadIT and the We Mean Business Coalition.

Coordinating the moving parts of value chains is essential

Mendiluce adds the industries need to agree on a roadmap to net zero, developed jointly by all stakeholders, so they can establish ambitious, science-based targets and start to act and show real progress against the roadmap. “That's where the investor community plays an important role, because by incentivising, supporting and pushing these companies to go faster, we can drive real change and transformation,” she says.

Turner agrees. “Within the shipping sector, we are engaging not only with shipping companies like Maersk, COSCO or the Mediterranean Shipping Company, but also with the ports,” he explains. “If somebody buys a ship which burns ammonia, they've got to know that at Rotterdam, Dubai, Singapore, there are tanks full of ammonia, and the pipes to refuel with it.

“We must try and get the whole value chain there. It's the shipbuilders, engine makers, ship operators, ports. All have got to move in lockstep,” he adds.

Figure 10: The Mission Possible Partnership approach aims to develop shared roadmaps

Forge a shared vision

Convene high-ambition stakeholders within a dedicated net-zero sector initiative:

- Industry players across value chain

- Major buyers across value chain

- Lenders

- Shareholders

- Asset managers

- Governments

- International governing bodies

Select net zero roadmap and metrics 

Develop comprehensive roadmap to net-zero by 2050 with 5-year increments:

- Demand projections

- Technology deployment curves

- Policy and demand prerequisites

- Corporate investment needs

- Infrastructure investment needs

- Asset retirement plan

- Role of transitional offsets and nature-based solutions

- Resulting GHG trajectory

Align on relevant metrics of climate-alignment:

- CO2 emissions targets

- Other relevant KPIs demonstrating sectoral decarbonisation

Commit  to action

Agree on relevant targets and commitments with a focus on 2025-2035 timeframe:

- Emissions targets

- Investment commitments

- Demand signals

- Procurement rules

- Lending guidelines

- Investment principles

- Government RD&D

- Government procurement

- National policies

Support implementation

Develop practical resources and toolkits to help operationalize commitments:

- Collaborative R&D

- Blueprint for zero-carbon value chain pilots

- Green product labels and standards

- Demonstration and scale-up financing blueprints

- Assessment tools

- Monitoring of commitments

- Develop emissions traceability protocols to underpin commitments and enable verification

- Integrate metrics into existing climate disclosure frameworks

Source: Mission Possible Partnership, as of June 2021

“One of the key success factors for any decarbonisation initiative in heavy industries is that it can't be done by policy or industry on its own,” says Watt. “It needs to be done in a public-private partnership where the enabling environmental policy must also make the business case viable. There are even roles to play for public finance and de-risking some of these transition technologies.”

Public procurement and investment

Governments are therefore key to supporting the transition.

“Public procurement policy is another demand signal that can help on the cost of finance,” says Watt. “Once you know you can sell low-carbon products, you can go to the banks. It's then a lower-risk investment for them, so the cost of capital might be a sliver lower.”

Lund University’s Åhman agrees subsidies and public procurement are vital, particularly since many of the materials concerned are used in infrastructure. “It's unrealistic for a government to ask for zero-emissions materials in public procurement today, but at least they can tell suppliers to disclose their emissions and come up with, for example, a ten per cent reduction for the first round, then a 20 per cent reduction the following time. That's a process to get it started,” he says.

The risk of stranded assets could also impact companies’ balance sheets and hamper their access to capital; those businesses could need financial support when this happens.7

Turner adds a number of the new technologies will require public investment in research and development. “You have a chicken and egg situation,” he says. “The price of hydrogen could come down if we began to produce hydrogen at scale, but nobody's going to buy it at a scale until the cost comes down. This defines the role the government has to play, whether by carbon pricing or upfront subsidies for the initial development of a technology. Sometimes, they can also support early R&D, though often support needs to go beyond this and into the deployment stage.”

Chauhan gives the example of aviation, where public financing of new aircraft development is well established. “Just to develop a normal plane, public money generally helps finance it, as the cost is in the billions,” she says. “If we're thinking of a brand new, energy efficient, hydrogen aircraft, it would need public support, particularly if we want to start developing these technologies today given the investment cycle.”

Investment opportunities and risks

In turn, the 2018 ‘Mission Possible’ report notes investors could help accelerate decarbonisation by: better evaluating climate-related risks and opportunities; establishing clear plans to shift their investment portfolios; and developing ‘green investment’ products with the support of development banks to facilitate sustainable infrastructure investment in developing countries.8

The divestment movement to, by default, not finance fossil infrastructure is a major change

The investment case for this is beginning to shift. For instance, a group of banks including ING, Société Générale, Citi, Goldman Sachs, Standard Chartered and UniCredit have created the Steel Climate-Aligned Finance Working Group to align their portfolios with climate targets in the steel sector to unlock investment and innovation.9

“The divestment movement to, by default, not finance fossil infrastructure is a major change,” says Åhman. “There are different views on this, but in Europe at least it has had some effect. Just asking the question: “Should we really take this risk?” has led to some change.

“It’s not in all sectors, but steel – and even cement – are reaching a tipping point whereby business and policymakers see the risk of continuing the current fossil-fuel path to be greater than the risk of investing in net zero,” he adds.

Challenges ahead

However, this is not yet happening in petrochemicals because the technological alternatives are unclear, many oil-producing countries are still investing in downstream moves in the value chain to secure a higher value for production, and global demand continues to grow.

The technological alternatives in petrochemicals are unclear

“Whereas steel and cement are relatively saturated markets, our consumption lust for plastics is increasing, especially in the transitioning and rapidly developing world,” says Åhman.

Chopinaud says that even in steel, there is some way to go before the investment case becomes compelling. “The sector is benefiting from strong market conditions but that won't last. It has had poor margins, high fixed costs and been oversupplied,” he says. “It is an industry that has been restructuring for some time and now they are talking about decarbonisation, which would call for a heavy investment pipeline. That will further weaken the industry.”

Given the conflict of interest of companies investing large amounts in technologies that will make their current asset base redundant and with higher spending potentially diluting their margins, the pace of decarbonisation will largely depend on how stringent regulation becomes. “If we don't think that is going to happen, decarbonisation will probably take much longer,” says Mela.

Opportunities emerge

On the other hand, Chopinaud sees cause for optimism in subsidies, like those that supported the early development of renewable energy. “Steel and fossil fuels receive huge subsidies across the world in different shapes and sizes,” he says. “Could those be redirected to develop solutions and decarbonise heavy industry?”

This kind of support could create a stronger investment case for hard-to-abate industries. “There are also opportunities for middle-income countries,” adds Watt. “They could become suppliers to new markets, which is a great opportunity, and something they are keen to look into.”

Watt also sees opportunities in the companies that provide infrastructure for net-zero technologies, from hydrogen transport and storage to CCUS plants and electrolyser technology.

Chopinaud sees opportunities in parts of steel as well, in electric arc furnaces capable of incorporating scrap steel. This is currently limited to supplying areas like construction, while aerospace or vehicles still require primary steel, but it could change as the technology evolves and steel quality improves. “In Europe and in Asia, particularly China, there is a lot of room for growth for electric arc furnaces, and so for scrap steel,” he says. “Oversupplied markets haven’t called for a market replacement yet, but we could see an acceleration of the switching of capacities from blast furnaces to electrical furnaces.”

Zhuang sees potential in other areas too, from substitution solutions such as rail to replace aviation or new materials to replace carbon-intensive steel or cement, to industry leaders in relatively new technologies like sustainable biofuels. “For heating buildings, heat pumps have a negative green premium,” she says. “They are more efficient than current higher-carbon heating technologies, so the economics are in your favour as an investor.”10

Will they, won’t they?

“Let's remember that, while a good contribution, these 2030 and 2050 targets are not legally binding for companies,” says Åhlén. “We are optimistic companies will spur each other into action in a race to net zero but the next five to ten years will be crucial.

“And if those investments are to happen, if this is to be proven at scale by 2030, there need to be productive discussions today among all stakeholders,” he adds. “Decisions need to start happening now – and the positive thing is we are starting to see a lot of activity.”

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