U Ethical (UE) is proud of its stringent divestment from the fossil fuel industry and related involvements. However, divestment as a strategic response to reduce exposure to carbon intensive companies, and possibly a driver to a low carbon transition, is not as straightforward as it may seem. Recently, the UE investment team discussed with UE’s Ethical Advisory Panel (EAP), the ethical considerations of investing in metallurgical (met) coal, commonly referred to as coking coal: a specific type of coal used in the production of steel. In particular, we reviewed the current state-of-play of the steel industry, dived into its key inputs, including alternatives and innovation to substitute for met coal, and questioned whether met coal, in our view, would pass the mark for an ethical investment. We did not think it did.

By now, the general public has also learnt that keeping global warming within 1.5 degree limits requires no new developments in fossil fuels and a fast winding down of current facilities and mines. Beyond core actors in the fossil fuel value chain, steel manufacturers have a key role to play in global decarbonisation due to their energy intensive operations: steel contributes 2.6 billion tonnes and a staggering 7% of global emissions annually¹.

However, steel is an essential component of infrastructure, used in the construction of our buildings, bridges, automobiles and machinery. It is a critical feedstock to steel manufacturing and until viable alternatives to coking coal or steel production exist, where must the ethical line be drawn?

How is coking coal used in steel production? And what are the risks?

Currently, the Basic Oxygen Furnace (BOF) is the most widely used process for steel production and accounts for about 76% of global steel production today². The BOF process relies on coking coal to reduce iron while the direct iron reduction (DRI) relies on the use of methane gas, renewable electricity or hydrogen. The remaining portion of steel production comes from using scrap steel. Shifting away from traditional BOF steel production is the obvious environmentally sustainable choice, however, various roadblocks stand in the way.

Main steel production pathways and material flows in 2019

Figure 2. Flow diagram of steel production process³.

With the world aspiring to transition towards renewable energy as its primary source of energy, fossil fuel dependent industries are exposed to both transition and physical risks. Additionally, the war between Russia and Ukraine has highlighted the geopolitical risk of fossil fuel supply from autocratic countries such as Russia. For example, Russian coal accounts for roughly 30 per cent of European coking coal imports and therefore impacts steel production, availability and, as a result, pricing⁴.

Opportunities in the steel transition

A recent article in Nature, a weekly international journal publishing the finest peer-reviewed research in all fields of science and technology, showcased five strategies for climate resilient steel production: reduce demand through education of steel users, reinvent steel production, swap fuels, scrap recycling and carbon capture and storage¹.

Out of these methods, we find the work in reinventing steel production most exciting and compelling. Using green hydrogen for DRI can reduce carbon emissions by 97% compared to current methods¹.

This relies on an increase in renewable energy capacity, which may not be always be economically feasible. With companies around the world piloting such plants, more sustainable steel is on the horizon. By comparison, the alternative of scrap recycling is already in use, but its availability cannot yet fulfil the growing demand for steel, despite some industry efforts to address the shortfall. Hence, at present, it cannot be relied upon to meet the sector’s climate goals.

EAF production reaches 72% of total by 2050

Figure 1. Graph showing change in steel production mix over time².

Head of ethics and impact Désirée Lucchese commented on the future of sustainable steel options: "if you do not know where you are going, you will end up someplace else. Today, we know both the ambition and vision required to a serious transition in line with the science. This ambition applies to steel’s feedstocks."

What is U Ethical’s exposure?

Coking coal and thermal coal production often go hand in hand, leaving very few companies that exclusively focus on coking coal production. Since U Ethical’s Investment Policy excludes fossil fuels, any company that produces thermal coal and coking coal is excluded.

U Ethical is not directly invested in companies involved in fossil fuel mining or fossil fuel-based energy generation, however, our portfolio company BlueScope Steel still requires coking coal to make steel. As ESG industry leaders, BlueScope Steel has committed to net-zero plans by 2050 and plans to reduce greenhouse gas emissions by 12 per cent in 2030, from its 2018 baseline. This will be achieved through emissions reduction technologies and improved operational efficiencies. Strong governance has also positively contributed to BlueScope’s team’s impressive sustainability credentials and provides us with confidence it can navigate a rapidly changing regulatory landscape.

Steels’ need for coking coal isn’t going away any time soon because the development in ‘green’ technology is still in progress. U Ethical stands by divestment in all fossil fuels and it was the view of our EAP that we should stay true to course and support greater ambition from steel manufacturers. We believe that through continued engagement with steel exposed portfolio companies, U Ethical can continue to influence the industry’s greater ambition and ingenuity to a safer climate change transition. This requires innovation fuelled by ambition.

¹https://www.nature.com/articles/d41586-022-00758-4

²Credit Suisse: Climate Transition Super Materials (April 2022)

³IEA: Iron and Steel Technology Roadmap (2019)

⁴AFR: Record coal prices tipped to rise further on Ukraine conflict