Money Talks, Carbon Walks
Teaming up with financial institutions to drive innovation helps us transform hard-to-abate industries.
This is an excerpt from RMI's 2022 Annual Report.
Read the full report.
Affordable, abundant renewable electricity can’t decarbonize every sector of the economy — at least not yet. For now, electricity isn’t a viable solution for select heavy industries that burn fossil fuel directly. But RMI’s pioneering work is transforming the steel industry with a novel approach to climate-aligned finance borrowed from the shipping industry.
The shipping industry burns heavy fuel oil and produces around 2.5 percent of global carbon emissions. In 2019, RMI and partners created the Poseidon Principles, a framework for measuring and disclosing financial institutions’ shipping loan portfolios’ alignment with the industry’s climate targets. The first year saw 15 banks participating, and today there are 28, representing roughly half of global shipping finance.
The Poseidon Principles help banks identify carbon hotspots in their portfolios and engage with those clients, as well as evaluate new loans for alignment with the industry’s climate goals. Over $1.2 billion in sustainability-linked loans in the shipping sector were made in the first year alone.
Now the entire industry is beginning to move. In 2020, 17 of the largest ship charterers (the parties that pay for the fuel on a ship’s voyage) signed a Poseidon-inspired compact called the Sea Cargo Charter to measure and disclose their own climate-aligned carbon impacts. The next steps will require innovation spurred by these new financial incentives. Because the useful life of an oil-burning ship is measured in decades, stakeholders must look beyond replacing oil-fired ships with new, efficient vessels and are experimenting with retrofitting existing ships to burn clean fuels like hydrogen, ammonia, and methanol.
From Poseidon Principles to the Sustainable STEEL Principles
Building on the success of the shipping finance community’s decarbonization efforts, RMI’s Center for Climate-Aligned Finance saw similar opportunities with another hard-to-abate industry: steel. The steel production process requires extremely high temperatures, usually from burning coal, to turn iron ore into metal. Every ton of steel produced emits almost two tons of CO2, accounting for 7.2 percent of global carbon emissions.
Announced this fall, the Sustainable Steel Principles (SSP) drew six signatory banks from the United States and Europe. Like the Poseidon Principles, the SSP is a framework for measuring and disclosing the climate impact of the lenders’ steel loan portfolios. Our aim is to catalyze climate action along the steel value chain, starting with banks’ measurements of client carbon impacts while increasing demand from steel consumers ready to go green.
“The Sustainable STEEL principles elevate ambition beyond wishful thinking and bring climate to the heart of real-world transactions. This is the stuff of moving from reducing financed emissions, to financing emissions reductions,” says Kaitlin Crouch-Hess, director of RMI’s Center for Climate-Aligned Finance.
William Husband, global head of metals and mining at Citi says, “As a leading lender and arranger of capital to the steel sector, Citi is proud to join this working group to support our collective journeys to net-zero and to facilitate the financing of our steel clients’ decarbonization efforts.”
Steel producers are exploring clean hydrogen-based steelmaking. Efforts are well along in China and in Europe, where Volvo has already produced a vehicle built from fossil-free steel produced with clean hydrogen by Swedish steelmaker SSAB. using with clean hydrogen. Steel giant ArcelorMittal has announced a $1.2 billion investment in a clean hydrogen-capable steel plant in Belgium. And to ensure we have enough green hydrogen to go around, the Green Hydrogen Catapult, a private-sector coalition hosted by RMI and convened with the support of the UN High-Level Climate Action Champions, committed to develop 45 GW of electrolyzer capacity by 2026.
Similar “climate-aligned finance frameworks” are in development for the aviation and aluminum industries, as well, and are poised to be a critical lever that unleashes the data and capital needed to transition hard-to-abate industries around the globe.
Case study: Pursuing Zero-Carbon Steel in China
CHINA PRODUCES AND CONSUMES more than half of the world’s steel, accounting for about 17 percent of the country’s carbon emissions. This makes the steel industry China’s second-largest carbon-emitting sector, after the power sector. In RMI’s report Pursuing Zero-Carbon Steel in China, we analyzed how to get China’s steel industry to zero-carbon by 2050. We mapped out three steps for the industry’s decarbonization — demand reduction, steel recycling, and switching to low-carbon alternatives — that will be critical to help the world meet its carbon reduction goals.
Case study: An Incubator for Carbon Capture
RMI AND PARTNER NEW ENERGY NEXUS launched Third Derivative (D3) to spur climate technology solutions in 2020, and the collaboration now includes more than 100 startups, and corporate and investor partners worth over $12 billion. D3 now fosters a new cohort of startups pursuing carbon removal, a key means of keeping climate catastrophe at bay. D3 joined forces with The Jeremy and Hannelore Grantham Environmental Trust to launch First Gigaton Captured, an initiative to bring carbon removal solutions from early-stage development to gigaton scale. The technologies supported have the potential to bring the cost of carbon removal with 1,000+ year permanence down to less than $100 per ton.
Case study: An Expanding Financial Alliance
THE BANKS THAT SIGNED the Poseidon Principles and make up the Steel Climate-Aligned Finance Working Group are just the tip of the spear. In 2021, at COP26 in Glasgow, 450 private financial institutions acted under the umbrella of the Glasgow Financial Alliance for Net Zero (GFANZ) to commit more than $100 trillion to achieve net-zero emissions globally by 2050. The GFANZ includes 95 banks that hold 40 percent of global banking assets. With a finance gap of over $130 trillion, we need scale, speed, and focus — and this is why RMI is building coalitions like Poseidon and the Sustainable STEEL Principles.
“RMI offers deep technical expertise with a unique reach into the enterprises, organizations, and governing bodies of China, which is responsible for 1/4 of emissions worldwide. We’re pleased that our support is helping transform the steel industry — one of the country’s highest emitting sectors — and advancing a zero-carbon transition.”
—David MacKenzie, Program Director for the Angela Wright Bennett Foundation