Forget green shoots! From the first to the last link in the steel supply chain, miners, metal recyclers, mills and end-use customers, along with their financing sources are focused on initiatives and investments to support sustainability.
Climate change is in focus globally. And carbon neutrality is the name of what ultimately amounts to a high-stakes, global endgame.
No small player in the race to cut greenhouse gases, world steelmakers currently account for approximately 7-9% of global carbon dioxide emissions. To reduce their collective carbon dioxide footprint, major mills have set ambitious goals, announced and pledged to meet interim targets, and are actively investing in new modern mills and technologies to decarbonize the steelmaking process. In the United States, the shift to more Electric Arc Furnace (EAF) production has positioned the industry well from the standpoint of being green. Some have also engaged with standard and certification programs such as ResponsibleSteel™ to demonstrate their commitment to these goals and to be held accountable by their stakeholders.
Mirroring that sentiment, Bank of America pledged $300 billion in financing to green initiatives from 2020 to 2030, bringing the cumulative total to almost $450 billion, while remaining committed to sustainability and carbon-neutrality itself.
Finance for green projects
Two important financing opportunities for companies in the industry are sustainability-linked financing and Green Bonds. Sustainability-linked financing enables a company to align its strategic growth initiatives with its ESG performance goals. While many companies are interested in adding sustainability-linked pricing to their core revolving credit facility to demonstrate this alignment, timing may be an issue because they are developing or revising ESG goals, gathering internal stakeholder sign-offs, are in the process of building out ESG reporting capabilities, or waiting for more comps to emerge in the market. To help with this process, Bank of America has developed an approach to act as Sustainability Coordinator to assist the company in identifying material ESG themes in their business and the ESG data that could become the basis for the Key Performance Indicators (KPI’s) that are established.
While sustainability-linked financing is about performance pricing based on achievement of or failure to meet goals, Green Bonds are about the use of proceeds. Green bonds are any type of bond instrument where the proceeds will be exclusively applied to finance or re-finance new and/or existing eligible green projects. Proceeds of the bonds can be used for ‘Eligible Green Expenditures’ in alignment with the International Capital Market Association (ICMA) Green Bond Principles 2018, specifically for pollution control, including waste recycling and waste reduction.
At the mill level, where scrap metal is recycled, companies can tap the bond market to finance capital expenditures related to waste recycling and reduction. Projects focusing on handling, sorting, processing, treatment and recycling of ferrous scrap metals through the steelmaker’s electric EAF is a good example. These bonds may also be able to be sold as tax-exempt industrial revenue bonds, providing companies with longer-term financing at very attractive interest rates.
To date, we’ve worked with several steelmakers to raise bonds to finance various steel-related projects For example, in August 2020, Bank of America served as Senior Manager for $265 million of fixed-rate, tax-exempt bonds for Big River Steel with the proceeds used, in part, to finance an expansion of that steelmaker’s Flex Mill. Such industrial development revenue bonds can provide long-term fixed-rate financing with maturities up to 30 years.
Other asset classes
Looking ahead, we predict ESG-related financing and the focus on sustainability will continue to increase. Climate change is one of the greatest environmental, social, and economic challenges we all face, and we all recognize the need to limit and reduce GHG emissions. To address that need, it’s important to regularly engage in discussions about how an organization can align their strategic objectives with ESG goals and about capital raising opportunities to achieve these objectives.
At Bank of America, we remain focused on metals sector clients and bringing ideas to help them achieve their objectives. And these days, there is no question the heart of the steel value chain is beating green.