Using Transition Pathways to Assess an Emerging Market Steelmaker
This illustrative case study highlights how a bank’s sustainability department could assess an archetypal emerging market steelmaker’s transition planning against transition pathways to support the bank’s risk department and front office.
Banks can use transition pathways as a starting point to:
Benchmark clients' transition plans against global and regional decarbonisation trajectories.
Identify and prioritize transition risks (e.g., policy, technology, market) relevant to credit risk.
Flag major financing decision points and potential opportunities (e.g., when/whether a steelmaker should reline a blast furnace or shift to low-carbon alternatives).
Disclaimer: This archetypal steelmaker is an amalgamation of several real steel companies' transition planning and conversations with several metals & mining bankers and sustainability teams. The assessment process presented here draws on RMI's experience conducting corporate transition assessments as well as other industry guidance. This case study reflects how a bank could leverage transition pathways to support its assessment of a client's transition.
Situation
In this hypothetical case, an emerging market steel producer (i.e., "the client") had a long-standing relationship with a global bank. As a large client, the bank had been tracking the steelmaker's emissions performance using the Sustainable STEEL Principles and the bank's sustainability department had conducted a routine corporate transition assessment of the steelmaker as part of their climate risk oversight process for high-emitting companies.
The corporate transition assessment uses a Red–Amber–Green methodology, drawing on responses to climate-focused questions about governance, strategy, emissions performance, and target setting. This first layer of the corporate transition assessment provides a high-level overview of climate risks and supports regulatory compliance. In this case, the client received an Amber rating, triggering internal escalation to both the bank's risk department and the front office relationship manager (RM) for further analysis. Although not considered high risk, the rating indicated material concerns about the client's transition trajectory.
The sustainability team raised concerns around the client's impact on the bank's financed emission targets and the climate risk team flagged the client for its high-emitting asset base. The RM requested to better understand the Amber risk score and explore avenues for engagement and transition finance opportunities. Led by the sustainability team, further analysis compared the client's future investment plans, business strategies, and dependencies to regional transition pathways to derive specific intelligence on risks and opportunities.
Complications
The assessment, informed by investment and business strategy documents, including an externally disclosed transition plan, revealed the client intended to transition in two distinct steps.
Step 1: Targeted a 15% emissions-intensity reduction from 2020 to 2035. This near-to medium-term target was backed up by investment plans to improve operational efficiencies, introduce biofuel injection, and increase renewable procurement. Between 2022 and 2025, the client successfully reduced their emissions intensity from 2 tons of carbon dioxide equivalent per ton of steel (tCO₂e/t steel) to 1.9 tCO₂e/t steel.
Step 2: Focused on the medium to long term, looking beyond 2035. This step did not outline specific emissions-reduction targets or outline a strategy for further action, aside from stating that the company was considering breakthrough technologies, including carbon capture, utilization, and storage (CCUS).
The bank, therefore, wanted to understand what — if any — risks and opportunities were revealed by the client's lack of specificity in their medium to long-term planning, and what the client's short-term plans showed about their current trajectory.
Using Transition Pathways to Assess Ambition and Identify Risks and Opportunities
Targets: The client's emissions-intensity target for 2035 (1.7 tCO₂e/t) was not aligned with any 1.5°C or well-below 2°C pathways (i.e., the MPP Regional TM2, the MPP Global TM, or the IEA NZE).
The bank also used the transition pathways to better understand potential risks and opportunities for the medium- to long-term.
Technology risk: The client's longer-term decarbonization strategy relied heavily on CCUS. This introduced a potential technology concentration risk, creating a dependency across the asset base without a clear fallback. While the transition pathways acknowledged the potential role of CCUS, they did not position it as a primary decarbonization lever in the region the client operated in, underscoring the risk of over-reliance in the client's long-term strategy.
Technology opportunity: Instead, the regional pathway identified that the client's key region of operation is well-positioned for the transition to low-carbon steel production using Direct Reduced Iron and Electric Arc Furnace (DRI-EAF) technologies, with advantages including abundant renewable energy, high-grade iron ore reserves, and low electricity prices.
To better understand the potential choices and dependencies facing the client, the sustainability team examined the client's physical assets using third-party intelligence. They identified that a major blast furnace (BF) was due for relining in the 2030s, when all transition pathways used called for no more unmitigated relining of BFs. Despite this, the capital-intensive relining decision is not mentioned in the client's transition plan.
The sustainability team flagged that relining this blast furnace could lead to carbon lock-in due to the uncertainty of their dependency on CCUS, leaving the client misaligned with climate goals and exposed to potential transition risks (e.g., policy, in the form of the EU-CBAM and/or market shifts such as green steel procurement standards) which could impact long-term credit quality. Given that the transition to low-carbon DRI-EAF technologies may be feasible in the region the client operates in, the client could have an opportunity to protect future market share and capitalise on transition opportunities.
*Emission intensity improvements (Step 1 of the Transition Plan as scaled to one asset) achieved through operational efficiencies, biofuel injection and renewable energy procurement.
**Plausible carbon lock-in pathway. (Step 2 of Transition Plan as scaled to one asset) Decision is made to reline blast furnace in 2030s, leading to continued reliance on Blast Furnace and Basic Oxygen Furnace (BF-BOF), locking in coal use and maintaining high emission intensities. Gradual reduction in emissions achieved through H2 injection and CCUS. A range of uncertainty is given depending on how effective and complete CCUS is.
*** Plausible low-carbon pathway shows a stepped change in emission reductions as (BF-BOF) is replaced by Natural Gas Direct Reduced Iron and Electric Arc Furnace (NG-DRI-EAF), which over time is replaced by H2-DRI, further reducing emissions, and eventually, dedicated behind-the-meter renewables to supply the EAF.
Resolution
The corporate transition assessment's use of transition pathways and asset-level data enabled the sustainability team to offer deeper intelligence to other banking teams on the client's longer-term transition risks and opportunities, owing to a technology concentration risk around CCUS in a region that is well positioned for DRI-EAF-based production pathways. In a separate engagement with the front office RM, the sustainability team repositioned the client's future blast furnace relining decision as a strategic opportunity.
This archetypal case shows how the sustainability team could use transition pathways in identifying risks, assessing the ambition gap of emission-intensity targets, and highlighting critical investment decisions, such as the relining of the major blast furnace asset.
