In the field of green finance, a variety of financing tools and products are currently available, including loans, bonds, equity, and insurance. To expand and diversify financing sources, more steel companies need to participate in financial markets, such as by issuing bonds, revitalising stocks and optimising assets through securitisation, reducing leverage levels through equity financing, and improving their long-term capital utilisation ability[12].

Bank loans are still the primary choice for corporate financing; Green loans are currently the largest source of funds for domestic and foreign steel companies to finance a low-carbon transition. In foreign countries, green loans have already supported companies in developing hydrogen metallurgy projects with significant emissions reduction effects. For China’s steel companies, green loans are mainly invested in general environmental protection renovation projects. With China’s need to eliminate excess capacity, banks have set more restrictions on loans to steel companies which has raised the threshold for these companies to obtain loans from banks and other financial institutions. However, with the advancement and implementation of financial standards for transition, more companies in the industry are expected to receive loan support.

Hydrogen metallurgical steelmaking technology, with its huge potential for emissions reduction, can attract significant loan support from overseas. For example, the Hydrogen (H2) Green Steel project in Sweden has received support from a number of financial institutions to build the Boden hydrogen smelting steel plant in northern Sweden. This support includes a conditional commitment on senior debt worth 3.3 billion euros from banks including AB Svensk Exportkredit (SEK) and BNP Paribas, the European Investment Bank’s 750 million euros in senior debt financing and another 500 million euros in subordinated debt support[13]. Some of the banks participating in the financing of H2 Green Steel are also members that jointly released the Sustainable Steel Principles in September 2022. The H2 Green Steel project plans to produce 5 million tonnes of green steel by 2030, which can reduce 95% of CO2 emissions compared to traditional steel production. H2 Green Steel will provide capital for the Boden plant through a combination of equity and debt financing. The project has obtained large-scale loans from many banks due to its remarkable emissions reduction effect and has been supported by market demand from many downstream clients, such as automobile manufacturers, major appliance brands, and construction companies, laying a solid foundation for the expansion of green steel’s production scale.

Green loans have long been instrumental in supporting environmental upgrades and relocation of steel companies. For instance, in Tangshan City, loans provided to steel companies increased from 76.77 billion yuan to 97.33 billion yuan between 2017 and 2020. The loans are comprised of liquidity loans and project loans, with the former used to supplement liquidity capital and the latter supporting relocation and environmental upgrades of companies. With China’s dual-carbon targets, the financing needs of steel companies in Tangshan City will shift from short-term financing to medium- and long-term financing for the technological transition, energy efficiency, and consumption reduction, in addition to corporate mergers and restructuring [14].

Moreover, for large-scale projects with significant financing needs, syndicates can be formed to provide substantial financing. For example, eight banks, including Bank of China’s Jiangsu Branch, and the Export-Import Bank of China’s Jiangsu Branch, formed a syndicate to provide 17 billion yuan in financing for Zenith Steel Group’s Green Fine Steel project, which has a production capacity of 20 million tonnes [15].

It is a demonstration project implemented by the Jiangsu Provincial Party Committee to relocate and upgrade the steel production to the coast, and its wastewater, exhaust emissions and solid waste will be disposed of in accordance with stricter environmental protection standards. However, there is little disclosure of energy saving and emissions reduction benefits as of now.

In comparison to the H2 Green Steel project loan case study, green loans in China’s steel industry are primarily invested in general environmental protection upgrades, and their specific emissions reduction effects remain unclear. This is partly due to the lack of concrete methods for carbon auditing for steel projects and their financing portfolios, and partly due to the lack of concrete requirements and information disclosure for a loan’s project finance emissions reduction indicators, leading to deficiencies in standardised assessment and transparency reports for China’s steel green loan projects. Going forward, China’s steel companies can reference the Sustainable Steel Principles to strengthen the carbon auditing of financing projects and obtain more loan support through the disclosure of quantified energy saving and emissions reduction effects.

Steel companies in China have faced various pressures in recent years, including production capacity regulation, an ultra-low emission transition, the need for energy saving, increased carbon reduction, and technological upgrading. This has made continuous investment a burden to the industry. In addition, the rising prices of raw materials and strict control of loans in high-carbon industries from banks have made it more difficult for companies to obtain endogenous financing. To break out of this dilemma, external financing, such as issuing bonds, has gradually become one of the avenues for steel companies to fill the gap in funding the transition.

Many steel companies in China have already started to raise funds for their transition and facility upgrades by issuing green bonds, certified sustainability bonds and transition bonds. These bonds are based on green and low-carbon development commitments and practical actions or projects. They closely follow domestic and foreign policy trends and are easier to be recognised and favoured by investors. The funds raised by these bonds can not only satisfy short-term needs but also increase medium and long-term capital reserves and demonstrate the strength of the companies to the market and investors, thereby relieving short-term debt repayment pressure.

Green bond financing is now mainly used for projects that comply with the green taxonomy. Steel companies with reserve projects can obtain financing by issuing green bonds if they are focused on the ultra-low emission transition, energy saving efforts, and emissions reductions, such as waste heat utilisation, and scrap steel recycling and reuse, such as scrap steel lending and recycling.

For example, Bao Gang United Steel Co. Limited successfully issued their 2021 green corporate bonds (first phase) on the Shanghai Stock Exchange in March 2021, totaling 500 million yuan[16]. The bond has a term of 5 years, and the coupon rate is 6%. No less than 70% of the funds raised in this issue of bonds (after deducting issuance expenses) will be used for the construction of waste pressure and gas energy saving and emissions reduction power generation projects, and no more than 30% will be used to supplement liquidity capital. The project supported by this issuance of green bonds aims to comprehensively utilise waste heat resources generated in the production processes for power generation and heat supply, which can improve resource utilisation and reduce business costs. According to the independent evaluation report of the bond, after the project is put into operation, it can save about 131,900 tonnes of standard coal per year. It also reduces about 88,400 tonnes of CO2 emissions per year while reducing about 2,176 tonnes, 2,058 tonnes, and 1,266 tonnes of sulfur dioxide, nitrogen oxides, and dust emissions per year, respectively. The successful issuance of this bond can increase the issuer’s current ratio and enhance short-term solvency. Meanwhile, fixed-rate corporate bonds also help the group lock in financial costs and avoid the risk of loan interest rate fluctuations.

Baoshan Iron and Steel Co. Ltd issued a green corporate bond totaling 500 million yuan on the Shanghai Stock Exchange in May 2022. The bond has a 3-year term and a coupon rate of 2.68%, and it aims to support the adoption of hydrogen metallurgy technology. This is the first green corporate bond for the low-carbon transition in China[17], and the project that it supports is China’s first million-tonne hydrogen-based shaft furnace[18]. This project represents a significant step for Zhanjiang Iron and Steel Co. Ltd, a subsidiary of Baoshan Iron and Steel Co. Ltd, in building a low-carbon metallurgical pilot demonstration zone and a zero-carbon pilot plant. The total investment required for the project is nearly 1.8 billion yuan, which will be used to replace conventional BFs with hydrogen-based shaft furnaces and replace them with clean energy[19]. The project also uses coke oven gas, a by-product of the coking process, to enable resource recycling. An independent evaluation institution has calculated that, based on the proportion of funds raised to total investment, the project can save 93,700 tonnes of standard coal and reduce 135,700 tonnes of  emissions per year after it is put into operation.

Although transition bonds can support capacity replacement projects that cannot be financed by green bonds, the overall issuance size of such bonds is still relatively small. For example, the 2022 first phase of medium-term notes (transition) issued by Shandong Iron and Steel Group Co. Ltd had a bond size of 1 billion yuan, a term of 2+N years (perpetual bonds), and an interest rate spread of 1.7%. The bond’s issuance rate hit a record low in the history of perpetual bond issuance by Shandong Steel, helping the company save more than 40 million yuan in capital costs[20]. All the funds raised will be used for low-carbon transition projects such as capacity reduction and replacement. The project is a major construction project in Shandong Province[21], primarily involving BF ironmaking and bottom-blowing combined-blown converter steelmaking system. Clean production technology and equipment will be used to enhance the energy efficiency in the steel production process and replace the original high-energy consuming production line. The project is expected to save 325,200 tonnes of standard coal annually and reduce 784,900 tonnes of CO2 emissions. The expected energy saving and carbon reduction performance of the project is designed according to the benchmark set by China’s steel industry, and the core performance indicator is the energy consumption per unit of product. According to an independent evaluation report of the bond in this phase[22], the energy saved in the capacity replacement project is higher than several national standards.

Sustainability-linked bonds enable the bond’s terms to be linked with the issuer’s sustainable development goals, without being tied to specific projects, and can provide financing at a company-wide level. However, different steel companies may use different key performance indicators (KPIs).

For instance, Liuzhou Iron and Steel’s 2021 first-term medium-term note (sustainability-linked) employs “nitrogen oxide emissions per unit product” as their performance indicator[23]. The company aims to reduce the emissions to 0.935 kg/tonne of product in 2022; If it fails to achieve this target, the coupon rate will increase in the bond’s third year. The independent evaluation of the bond found that the chosen target is in line with the company’s goal of completing an ultra-low emission transition by 2023.

Meanwhile, Shandong Iron and Steel Group Co. Ltd.’s 2021 first-phase medium-term notes (sustainability-linked) use “comprehensive energy consumption per tonne of steel” as their key operating indicator. The company aims to achieve an energy consumption level no higher than 592 kg of standard coal per tonne of steel by the end of 2022. If the target is not met, the call provision will be triggered, and all notes will be redeemed on the second interest payment date. The bond attracted 17 institutional investors during the subscription period, with a subscription volume of 2.1 times. The final issue price was significantly narrower than the subscription range. The bond’s proceeds will be used to repay the company and its subsidiaries’ interest-bearing debts.

Issuing sustainability-linked bonds has higher requirements on project reserves and low-carbon performance management compared to traditional bonds. Additional information disclosure, such as disclosing the actual progress and performance of the project, or conducting certification and evaluation of corporate-level transition performance after issuance, is required (see Appendix 2 for details). Moreover, companies must actively communicate with external stakeholders and obtain the key benefits of the bonds through independent evaluation and auditing by reputable institutions to improve recognisability and reliability.

Highly leveraged companies and small and medium-sized enterprises, which may find it difficult to obtain loans and issue bonds, can attract more investment through equity financing instruments like stock issuance, allotment, debt-for-equity swap, or the establishment of equity investment funds that support the transition and develop more green funding sources.

After green bonds, green stocks are expected to become one of the core assets of green finance. Swedbank first proposed and put into practice the concept of green stocks. In 2021, Nasdaq launched the “Green Equity Designation” programme[24] for issuers in the Nordic market and designated CICERO and Moody’s ESG as evaluation service providers for the programme. Nasdaq requires that green-labelled companies derive 50% or more of their turnover from activities considered green (with no more than 5% of profits from fossil fuels) and have more than 50% of their investments in green activities. The core part of the green stock evaluation framework is the green evaluation of the companies’ turnover and investment. CICERO categorises business activities into five shades of green: “dark green”, “medium green”, “light green”, “yellow” and “red” and quantifies the proportion of green income in a company’s total revenue and the proportion of total investment. This will help investors understand the green value of companies in the low-carbon transition and reduce the risk of greenwashing” The best practices released by CICERO, however, do not include steel companies. For instance, Boliden AB, a metal mining, smelting and recycling company, received the “medium green” label from CICERO after its investment was primarily used in low-carbon zinc production and other energy efficiency improvements and pollution prevention measures, resulting in a significant reduction in greenhouse gas (GHG) emissions[25].

Companies can also expand financing for their low-carbon transition by setting up equity investment funds, in addition to obtaining a green stock certification. For instance, the Baowu Carbon Neutral Equity Investment Fund, which is the largest carbon-neutral fund in China’s domestic market, was jointly established by Baowu and the National Green Development Fund Co. Ltd. It has a total size of 50 billion yuan, with a first phase of 10 billion yuan, and invests in areas like clean energy, energy conservation, and green technology. At least 50% of the investment is in Baowu’s carbon-neutral industry chain, with no less than 60% of the funds invested in key provinces along the Yangtze River. However, equity financing is affected by the price-earnings ratio and is difficult to become the main source of capital to support the low-carbon transition of listed steel companies in the short- to medium-term[26].

Although green financing in China has great potential to be an important supplement for companies’ low-carbon transition capitals, the country still lacks unified concepts and standards in green stocks, green funds, and ESG investment, as well as clear definitions of green activities of capital at the corporate level, which may lead to greenwashing. To enhance investor confidence, it is recommended that steel companies follow the CICERO green stock evaluation framework, increase their investment in green technology and transition tactics, increase their operating income from green activities, actively disclose environmental information and establish reasonable environmental governance structures, policies and climate targets.

Despite the efforts made by China’s steel companies in exploring the use of green financial instruments, the overall rate of utilisation remains low[27]. Going forward, green loans and green bonds will still be important sources of capital to facilitate the low-carbon transition of the industry.

A low-carbon transition is integral to China’s steel industry’s development goals. During the “13th Five-Year Plan,” the industry aimed to reduce excess capacity, transition to ultra-low emissions and promote energy conservation and emissions reduction. At the same time, the financing focus was on reducing the corporate asset-liability ratio and supporting green development through innovative financial instruments, such as resolving excess capacity. Steel companies also carried out energy saving and environmental protection through process transitions and product upgrades. The “14th Five-Year Plan” era brings about a critical period where old and new transition requirements coexist. Despite facing challenges such as limited technology, inconsistent standards, and high transition costs[28], China’s steel companies can reference current financing practices from both China and foreign countries to expand transition financing through multiple channels. Our analysis suggests that companies take actions and raise resources through the following three-pronged approach:

To meet the capital needs for medium-term emissions reduction technologies and pilots using advanced technology, steel companies need to create diversified financing channels and mobilise more resources during this critical transition period. Loans, bonds and equity financing with green and low-carbon elements can provide funds for various types of low-carbon transition activities of steel companies and improve their recognisability in the investment market. Based on project reserves, development targets, and financing plans, companies can choose low-carbon financing tools. Additionally, besides green loans, they can consider the feasibility of transition bonds, which can be used for capacity replacement projects, and sustainability-linked bonds, which require corresponding sustainable development targets and action plans but do not require actual corresponding projects. Steel companies can also explore the use of green equity financing.

Green financial instruments often stipulate specific requirements associated with the companies’ environmental or transition performance or the types of projects looking to raise capital. Companies are often required to regularly comply with information disclosure standards, including the disclosure of climate progress and performance at the project or corporate level (see Appendix 2 for details). To effectively use low-carbon financing tools, steel companies need to establish clear transition targets, roadmaps and core performance indicators at the group level, which will guide the determination of reasonable financing plans and pace. These will also be important criteria for investors and financial institutions to evaluate the investment potential of companies. The People’s Bank of China (PBOC) plans to issue a financial catalogue for sectoral transitions, including for the steel industry[29], which will become an important reference for financing. Steel companies can also refer to international steel industry transition technological pathways and standards (see Appendix 3 for details), including technical standards from the Science Based-Targets Initiative (SBTi) and the Climate Bonds Initiative (CBI).

Although China’s policies and standards have not established mandatory requirements on carbon emissions for the steel industry, the “Reform Plan for the Legal Disclosure System of Environmental Information” requires companies to disclose carbon emissions information, including emissions and discharge facilities[30]. The China Securities Regulatory Commission (CSRC) and China’s stock exchanges also require listed companies to disclose carbon emissions information in the form of ESG reports, social responsibility reports or sustainable development reports[31]. Globally, there are disclosure standards and frameworks developed by the Global Reporting Initiative (GRI), such as the Task Force on Climate-related Financial Disclosures (TCFD) and the Climate Disclosure Standards Board.

As domestic and foreign carbon markets develop, and international trade policies constrain carbon emissions, it is essential for the steel industry to optimise carbon emissions auditing and management. Therefore, steel companies must prepare for these developments by taking action early on.