The role of international finance institutions in the low-carbon steel transition.

2 June 2022

Written by Aaron Maltais, Linus Linde, Felipe Sanchez, Gökce Mete

Key messages

  • International finance institutions (IFIs) have limited exposure to the steel sector and tend to be at early stages of development in their green industrial strategies.
  • Historically, the funding of steel projects has not aligned strongly with IFIs’ priorities and IFI financing has not met the corporate needs of the steel sector.
  • However, IFIs can play a key role in helping to set in motion the transition to green steel in developing regions, in helping to de-risk first movers and helping governments to set ambitions, pathways, policy frameworks, and standards.
  • IFIs can also support governments in development of hydrogen, procurement, and circular economy strategies and in development of utility scale renewables.
  • The ways forward will likely vary significantly between different IFIs, depending on scale of capital available, the level of development on green industry in their member countries, the type of steel sector development suited to specific countries/regions and on the IFI’s specific business/financing models.

The steel sector is a major contributor to global CO2 and greenhouse gas (GHG) emissions, accounting for 11% and 7% respectively (Swalec & Shearer, 2021). Reaching net-zero emissions from the steel sector is therefore tantamount to a prerequisite for achieving the goals of the Paris Agreement.

Despite the growing number of steel producers announcing investments to switch to low-carbon production processes, including five out of the top 10 largest producers (Vogl et al., 2022), there remains a large gap between announced carbon-intensive and low-carbon capacity in the pipeline.

The steel sector has a high capital intensity and long investment cycles, and firms operate in highly competitive international markets with thin profit margins (IEA, 2020c). At the same time, the scale of the transformation of the sector requires an increase of investments by about 20% compared to business-as-usual (IEA, 2020b).

Currently, most steel production is located in Asia, with 54% located in China alone (Bataille et al., 2021). In the coming decades, China is expected to remain the largest producer though its production will fall while production in the US and the EU is expected to plateau. The largest increases in production are expected to come from India, Nigeria, Pakistan and Indonesia (Bataille et al., 2021). This marks a geographic shift in global production. Meanwhile, demand for steel is expected to increase as population growth, industrialization and urbanization in emerging economies continues (IEA, 2020d), exacerbating the challenge to reduce GHG emissions.

To avoid lock-in to high polluting assets for the next 15-25 years and jeopardizing climate commitments it is crucial to get the right transformational finance, technical assistance, and multilateral cooperation in place to help emerging economies to leapfrog to low-carbon steel production.

Against this backdrop, in this brief we explore the role that international finance institutions (IFIs) can play in the decarbonization of the steel sector in emerging economies. To this end, we firstly gathered data from IFIs’ project databases to ascertain the current lending portfolio exposure of major IFIs to steel investments, as well as IFIs policies and strategies regarding climate finance, heavy industry, and steel decarbonization.

Aside from desk-based research, we also conducted interviews with representatives from major IFIs to delve into the barriers and opportunities for IFIs to play a bigger role in the decarbonization of the steel sector. This brief presents our preliminary findings, ahead of our final report publication in autumn 2022.

Reaching net-zero emissions from the steel sector is tantamount to a prerequisite for achieving the goals of the Paris Agreement.

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