As the world economy transitions to renewables and electrification, a critical paradox emerges: the steel enabling our clean energy shift also harbours an overlooked climate risk.
Key takeaways
- Methane emissions from metallurgical coal mining account for approximately 27% of the steel’s value chain climate impact, highlighting a significant and often overlooked climate investment risk.
- Fidelity International is actively collaborating with industry peers, including Aware Super and Royal London Asset Management, on a systems-level approach to seek to address this methane challenge.
The methane challenge hiding in plain sight
Steel underpins the global economy, from the two hundred tonnes needed to build each megawatt of wind capacity to the vast quantities required for electric vehicle manufacturing and grid infrastructure. As the world decarbonises, steel demand will remain robust with no substitutable material. Yet beneath this story lies an uncomfortable truth that is often overlooked.
Analysis from Ember reveals that methane emissions from metallurgical coal mining account for approximately 27% of the steel industry's near-term climate impact. This is equivalent to the emissions of Japan in 2023. This finding fundamentally challenges how investors should evaluate steel investments in a carbon-constrained world.
To date, steel decarbonisation strategies have focused on breakthrough technologies like hydrogen-based steel production and electric arc furnaces. The delayed adoption of these green technologies means prolonged use of metallurgical coal and the generation of upstream methane emissions, which has material implications for the lifecycle emissions of steel. Methane is a super-pollutant that warms the atmosphere 80 times more than CO2 over a 20-year period. This warming potential creates both immediate risks and compelling opportunities for investors willing to look deeper.
Methane as an investment risk
The intersection of steel's economic centrality and metallurgical coal's methane intensity creates a unique investment risk. Improvements in satellite monitoring is making methane emissions increasingly visible. Regulations are expanding with the EU imposing strict methane monitoring requirements, while in Australia the Safeguard Mechanism now captures methane emissions, with compliance costs potentially reaching hundreds of millions annually for exposed facilities. In addition, stakeholder expectations are rising and coming to the fore. These aren't distant risks—they're current realities affecting supply chains today.
Yet most steel companies' decarbonisation strategies remain silent on methane. Review any major producer's sustainability targets and you'll find detailed roadmaps for furnace conversion but scant mention of upstream emissions. This disconnect between reported progress and actual climate impact is unlikely to go unnoticed for long.
Fidelity's systems-level engagement approach
At Fidelity International, we recognise that addressing methane requires more than traditional company engagement. The interconnected nature of steel value chains demands coordinated action across a variety of stakeholders.
Industry alignment: We are actively collaborating with peer investors, including Aware Super and Royal London Asset Management, to address this methane challenge from a systems perspective. Additionally, we are working alongside the UNEP’s IMEO Steel Methane Programme to help establish an industry-wide methane abatement framework. We think there is a strong opportunity to replicate the success of OGMP 2.0 for the metallurgical coal sectors, particularly the success of its investor partnership.
Policy engagement: Beyond boardroom discussions, we're engaging with policymakers to advocate for a clearer direction on methane regulation to provide a roadmap for our investee companies. Policy is critical and could shift the steel value chain to move faster on methane abatement.
Value chain players: We're engaging with industry experts, funding providers and innovation players to facilitate dialogue and connect the dots. We know company action alone is insufficient, so we are exploring how to leverage other players in the ecosystem to create a supportive abatement environment.
Looking ahead: the transformation imperative
The steel industry stands at an inflection point. As production keeps up with clean energy infrastructure needs, the sector must simultaneously address its methane challenge or risk undermining the very transition it enables.
For investors, the path forward is clear. Those who integrate methane assessment into their steel sector analysis today will be better positioned to navigate the regulatory, technological and market shifts ahead. This isn't about divesting from steel—it's about identifying and supporting steel value chain companies to develop credible emissions reduction strategies.
The window for action is narrowing. Steel value chain companies that recognise and address their methane challenge now will improve their operational resiliency and be better positioned to capture the value creation opportunities of tomorrow's low-carbon economy.
The bottom line
Methane represents the next frontier in climate risk management for the steel sector. While the challenge is significant, so is the opportunity for investors who act decisively. By engaging with companies, supporting policy development and refining our assessment methodologies, we can contribute to the transformation needed while protecting and enhancing long-term returns.
The steel industry's methane blind spot won't remain hidden much longer. The question for investors is simple: will you be ahead of the curve or behind it?
We want to thank Aware Super and Royal Asset Management for their collaboration and support on tackling this key climate risk.
Connect with Fidelity to learn more about the systems-level engagement approach to address the methane challenge. And stay tuned—our comprehensive research paper on steel sector methane challenge will be released soon.
