‘A matter of survival’: Why Indonesian steel giant Gunung Raja Paksi is going net-zero

With carbon border taxes making life harder for carbon-intensive industries, Gunung Raja Paksi feared it could not export its products to the West if it did not slash emissions. The firm’s top executives Kimin Tanoto and Kelvin Fu tell Eco-Business about how a firm in the hardest-to-abate sector is reducing its carbon footprint. 

For PT Gunung Raja Paksi (GRP), one of Indonesia’s largest steel companies, the motivation to cut emissions is business survival, says Kimin Tanoto, a member of the company’s executive committee. 

With the introduction of carbon border taxes by the European Union and the United States, the cold, hard reality for the steel maker is that it could miss out on huge markets if it does not reduce its carbon footprint. 

This is not easy for a steel business. Steel making accounts for 6 per cent of global energy consumption and 6 to 9 per cent of carbon emissions, a footprint that is projected to grow by 15 to 20 per cent between 2030 and 2050 as the world urbanises. Decarbonising the steel trade is also expensive. It will require US$1.4 trillion in investment by 2050.

Despite the odds, in February this year, GRP unveiled its net- zero roadmap, aiming to be carbon neutral by 2050 and achieve net-zero emissions.

“We don’t want to end up with stranded assets,” said Tanoto, who is also founder and chief executive of Gunung Capital, an investment management company affiliated to GRP.

“If the world’s top economies are pivoting towards carbon neutrality, exporting nations in Southeast Asia will have to comply. If your goods are not deemed green, you will face a huge tax burden.”

Working towards net zero will mean removing 135,937 tonnes of carbon dioxide equivalent (CO2e) from the company’s Scope 1 emissions, which includes the firm’s facilities and vehicles. GRP’s Scope 2 emissions, which include purchased electricity, steam, heating and cooling, are bigger – 394,860 tonnes CO2e, roughly three- quarters of its overall footprint.

GRP’s greenhouse gas inventory doesn’t include the company’s Scope 3 emissions yet, which include capital goods, transportation and distribution, waste and business travel. The steel industry’s Scope 3 accounts for about 29 per cent of the sector’s overall emissions.

As difficult as planning to decarbonise a steel company is, getting buy-in from management was a major first hurdle. “We first had to explain to senior management and shareholders what carbon neutrality is, even what sustainability is,” explained Kelvin Fu, Gunung Capital’s co-founder and managing partner.

“We had to convince them what going green is about, and what it means for steel – and even if it’s possible for a steel business to go green,” he recalled. Explaining the merits of decarbonisation to top management was a six-month process and it took another year of data gathering during the Covid-19 pandemic to set the wheels in motion for the net-zero roadmap.

In the end, the selling point was that decarbonisation is a business opportunity as well as a necessary survival strategy.

“I believe the green movement is the business opportunity of our lifetime,” said Tanoto. “If we pivot properly and invest properly, there’s a lot of wealth creation to be had. A reset is going to happen across industries, in energy, building materials and property, and we want to be on the right side of the transition.”

In this interview, Tanoto and Fu talk about the challenges of cutting carbon from one of the hardest industry’s to decarbonise and why the future of the company isn’t just rooted in green steel.

GRP is no longer reliant on carbon offsets to reduce its climate footprint. What’s the company’s plan to curb emissions?

Kimin Tanoto: Instead of spending money on carbon offsets, we wanted to actually decarbonise ourselves. Previously, we had looked at just buying offsets, but we realised that relying on offsets is bordering on greenwashing.

Decarbonising GRP will be done in three main ways; investing in renewables – 80 per cent of our carbon footprint can be reduced by switching to green power – improving operational efficiency, which will account for 15 per cent of reductions, and the last 5 per cent from a combination of insetting [financing climate protection projects along the company’s own value chain] and, potentially, carbon capture, although that is a bit premature for us now.

Give us a sense of some of the challenges you faced in preparing the company to decarbonise?

Kelvin Fu: The consultancy [GRP hired sustainability consultancy ERM to draw up its GHG inventory and help with its reduction strategy] had thousands of questions: what are your energy inputs, where are your business lines, and so on. If you look at our footprint, it’s hard to appreciate how massive a task this was. All individual business units have varying technology systems. How do you get the energy output from individual business units? How do you get engineers to explain what it takes to produce a batch of steel and what the carbon footprint is for that batch?

We did a lifecycle assessment, and ERM then challenged our findings before we came up with a final number [for the carbon footprint]. We are now going to recalculate our footprint every year, and we must show step-by-step how we’re reducing the footprint. We had to realign some of our business processes and rewire the ways our people think. Hiring sustainability people was almost impossible at the time, the talent pool was just too small. We had to train people in-house.

How big is your sustainability team and how is it structured?

We have four people, two full time. They report directly to the CEO and have the authority to pull resources and data from across the company. Our head of sustainability was previously our head of corporate planning, Sheren Omega, who took about a year and a half to train up to do the role. The heavy-lifting [for setting the net-zero roadmap] was done by the consultants, but now the sustainability department is accountable for the targets we’ve set.

How have you approached change management within the organisation?

Kelvin Fu: There are two ways to influence people: with a stick and with money. One way to do them both is with key performance indicators (KPIs). We introduced sustainability KPIs for the management team this year. So now director-level sustainability KPIs for the management team this year. So now director-level bonuses are linked to the environmental performance of the company.

Kimin Tanoto: It affects our bottom line if management doesn’t meet those KPIs. Our green vision has allowed us to get cheaper corporate loans from the bank.

Has the company aligned with the Science-Based Targets Initiative (SBTi) , which aligns decarbonising companies with the Paris agreement on climate change?

Kelvin Fu: We’re not signatories to that yet. In terms of our footprint, we are aligned with Responsible Steel, a global standards and certification body for the steel trade, which has informed our [net-zero] framework.

Until recently, many steel companies would have viewed the indirect emissions along their value chain – Scope 3 emissions – as less of a priority  than Scope 1 and 2 emissions. But Scope 3 is now coming under the spotlight for steelmakers. What’s your take on the need to tackle Scope 3 emissions?

Kimin Tanoto: In my opinion, Scope 1 and Scope 2 are more critical. But we still need to tackle Scope 3, and it’s something that we’re going to work with a consultant to figure it out. A lot of Scope 3 emissions come from energy and raw materials. We are running an electric arc furnace, which uses scrap recycled metal as stock. That feeds into the circular economy narrative

Kelvin Fu: There aren’t many scrap metal providers that are tech savvy and track their footprint, which is an issue. But we now have a responsible procurement policy in place as part of our roadmap, and we’re going to push checklists on our suppliers to say, look, we’re giving you some grace period, but soon you’re going to have to report your Scope 1 and Scope 2 – because that’s our Scope 3. But it will take some time. It will take a lot of education to drag them along.

GRP has plans to grow. So how do you balance growth with sustainability

Kelvin Fu: My view is that it’s not one or the other. Our current export growth is five per cent. We want to double or even triple that within two to three years. We don’t want to just be an Indonesian company, we want to export to the rest of the world. Our exports are regional [Asia Pacific], where carbon taxes are starting to come into play, for instance in Singapore, and to Europe and the United States, where carbon taxes are already in play. The only way for us to access those markets is for us to be a low-carbon business.

We already have some [certification], like the [International Organisation for Standardisation’s] Environmental Product Declaration, which has opened up Standardisation’s] Environmental Product Declaration, which has opened up markets that were previously closed to us. We’ve already got a head start having an electric arc furnace (EAF) – which expends about a third of the emissions of a traditional blast furnace – and we have a strong circularity story. We have to stay ahead of our competitors. For them, switching to EAF is not so easy because it involves heavy capex.

To what extent will you be relying on carbon capture, use and storage technology (CCUS) to meet your net-zero target?

Kimin Tanoto: We will not – for now. We will focus on renewable energy and energy efficiency first. Carbon Capture will be our last resort, before we then look at carbon offsets. If we were located in Central Java, it would be easier to deploy CCUS as there are a lot of gas fields there. CCUS would be very difficult for us, because of our location in a built-up town [GRP’s plant is located in Cikarang Barat, West Java].

It is not always easy for companies in Indonesia to source renewable energy and the grid is heavily dependent on coal. How are you approaching renewable energy procurement?

Kimin Tanoto: We wanted to put solar panels on all of our roofting, so we could source renewable electricity directly for our power transmission. We were in talks with Total Energies and were working through the details. But PLN [PT Perusahaan Listrik Negara, Indonesia’s state electricity firm] blocked it. They said we couldn’t consider the deal, because they had excess power [PLN has excess power capacity from its coal-based Java-Bali grid, so has put a cap on solar power installations] and we need you to take this excess power.

A lot of industries in Indonesia are running into the same problem. They want to go green and install solar panels and wind turbines, but their plans are being blocked. We have to keep lobbying to use more renewable energy. We have to keep pushing.

What sort of reskilling and upskilling of GRP’s workforce will need to happen for your company to transition to net-zero?

Kelvin Fu: We have more than 4,000 employees. We still need to constantly reinforce the message that going green is the future. We will require them to track the electricity output to an individual batch of steel, so we can hold employees individually accountable for our carbon emissions. They will have to be cognisant of their footprint, so we can run our operations as efficiently as possible. That will affect our finance team, since our sustainability-linked loan is tied to our carbon reduction achievements. Our net-zero target is interconnected throughout the company, so a lot falls on our head of sustainability to raise awareness of the need to decarbonise in every department. Once sustainability is embedded in everyone’s KPIs, the company can move as a whole.

What’s the response been like to the net-zero plan that has been put into place?

Kelvin Fu: There was resistance initially, but we have a new, young, ambitious team in place. If we’d put in place a KPI that was not achieveable – let’s say GRP by 2030 – it wouldn’t have worked. It has to done gradually. We cannot expect scrap yards in Indonesia to reduce their emissions overnight. We cannot enforce everything in one shot.

Are there companies in the steel sector you’ve looked to for inspiration to help you meet you decarbonisation target?

Kimin Tanoto: ArcelorMittal [a Luxembourgish-Spanish-French steel firm, the largest in the world] and Nucor [the largest steel firm in North America]. Nucor’s strategy has always been rooted in recycling, so they’re in a very good position to take advantage of the green movement. Their carbon footprint is one of the lowest and they take a lot of care to keep reducing it. In Asia, Posco [a South Korean steel maker] is one of the leaders. 

H2 Steel [a Swedish firm which is to launch the first renewable hydrogen-based integrated steel mill] is also impressive, although that is a greenfield project with new technology and a five-year offtake agreement with government support, which is unheard of.

What has been the biggest challenge in decarbonising GRP?

Kelvin Fu: I think green steel is going to fundamentally change the way we think about steel production. And one of the most difficult things to do is to work out where to locate your plants. Previously, you needed to locate your plant near a coal mine or an iron ore mine or a port to ship your product to market. But now you need to think about where you’re to source green power from. We’ve been thinking about our expansion plan, and we’re conflicted about where to put certain facilities.

There’s talk about green hydrogen, but where is that going to come from? What are your plans for the future?

Kimin Tanoto: We’re in the business of finding partnerships and opportunities. So we’ll looking to make investments in other climate technologies that can assist our manufacturing plant. We do not just want to be seen as a steelmaker. We want to replicate what we have learned decarbonising GRP and apply the playbook to other complementary industries. Now when we go into a new business venture, we can look at it through a low-carbon lens. That’s the next step for us.

This article has been published with the title:
“ ‘A matter of survival’: Why Indonesian steel giant Gunung Raja Paksi is going net-zero”
https://www.eco-business.com/id/news/a-matter-of-survival-why-indonesian-steel-giant-gunung-raja-paksi-is-going-net-zero/ 

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