By Eric Onstad
LONDON, Nov 22 (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.
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 Centre for Sustainable Finance.
"As we currently stand, the economics of decarbonising don't
really add up," she told Reuters in an interview ahead of the
release of her centre'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)