'Green' steel needs innovative financing to meet huge bills: HSBC

LONDON (Reuters) - Steel, the biggest industrial contributor to climate change, needs innovative financing such as “transition bonds” to help pay the massive costs of turning green, the head of HSBC’s sustainable think tank said.

FILE PHOTO: Steel bars are pictured in a mill in Chau Khe village outside Hanoi, Vietnam March 30, 2018. REUTERS/Kham/File Photo

Making steel is energy intensive, often using coal, and contributes about 7% of total global emissions of carbon dioxide.

While technologies are being developed to lower and eventually halt steel's contribution to climate change, finding financing to pay for it is a challenge, said Zoe Knight, head of HSBC's HSBA.L Centre for Sustainable Finance.

“As we currently stand, the economics of decarbonizing don’t really add up,” she told Reuters in an interview ahead of the release of her center’s report on moving to zero-carbon steel.

A shift to zero-carbon steel production by 2050 will require up to $80 billion a year of investment, according to the Energy Transitions Commission, on which Knight sits as a commissioner.

This is a major challenge for a cyclical, capital-intensive business like steel with relatively low profit margins of less than 10%, the HSBC report said.

Green bonds - fixed-income securities that raise capital for projects with environmental benefits - have taken off in recent years and are on track to reach up to $250 billion in issuance by the end of the year.

But there are strict criteria for the projects the bonds can be used to finance, which Knight says makes them unsuitable for the steel industry.

Steelmakers need cash to implement new technologies during a period in which they will still emit large amounts of greenhouse gases.

Knight says the development of a new type of green security, called a transition bond, will be key for steel. These products are aimed at helping businesses gradually switch to more environmentally sustainable operations.

“The transition method is critical for solving climate change for all of these sectors that are in between,” Knight said.

“This is a financial product that helps to bridge the gap for companies that want to demonstrate they’re addressing the climate problem.”

HSBC was a joint lead manager in July for a $500 million transition bond to help Hong Kong’s Castle Peak Power pay for a gas turbine project.

Transition bonds are still in their infancy and there are questions about whether they will carry a separate label or be a subset of green bonds.

But such bonds could be attractive to companies that want to head off any potential divestment moves by investors.

“Institutional investors haven’t tended to divest from steel, but it’s a live story. It’s natural that steel will come under increased scrutiny at some point,” Knight said.

“Having transition finance would help to distinguish between which companies are going to be moving to a low-carbon environment and ones that aren’t.”

Reporting by Eric Onstad; Editing by Jan Harvey