Republican attacks on ESG aren't stopping companies in red states from going green

Back in the woods of South Carolina's Lowcountry, at a factory spread across thousands of acres near the Cooper River, a company called Nucor is trying to solve one of the thornier challenges of climate change: making steel with the least greenhouse gas pollution possible.

Steel is a building block of modern society. It's in cars and trains and bridges. And producing it is a major driver of global warming, accounting for up to 9% of all the carbon dioxide emissions that humans generated in 2020. Recently, the steel industry's customers, including automakers, have been pushing for a greener product. So, Nucor's exploring its options. It wants to be the go-to company for low-carbon steel.

"We can continue to grow our business and take [market] share because we have something that differentiates us from our competition," Greg Murphy, an executive vice president at Nucor, says as a furnace at the plant thunders nearby, turning scrap metal into molten steel.

But Nucor's efforts to cut its planet-warming emissions put it at cross-purposes with some of South Carolina's political leaders. Republican politicians, including in the Palmetto State, are deeply skeptical of the actions that companies like Nucor are taking to manage the risks and opportunities from climate change. They say investors who reward those sorts of corporate initiatives are focused on advancing "woke" policies instead of making money.

In South Carolina, lawmakers are considering a bill that would bar managers of state retirement funds from considering environmental issues when they're making investment decisions. The legislation was introduced after South Carolina's treasurer, Curtis Loftis, said last year that he was pulling $200 million from BlackRock because of the investment firm's consideration of environmental, social and corporate governance (ESG) factors.

The attacks on ESG in South Carolina are part of a national campaign that's being waged by conservative politicians and activists, who accuse companies of using their investments to push a liberal agenda. The backlash tends to be directed at big financial firms that consider ESG factors. So far, Republican politicians have left alone the companies those firms are investing in, such as Nucor, which are trying to operate more sustainably.

As conservatives strive to make ESG a wedge issue in American politics, many industrial companies in the U.S. are working to protect their operations and profits in a hotter world. And the Republican-controlled states leading the anti-ESG charge, despite their rhetoric, have benefitted from those investments. Nucor says it's spending almost half a billion dollars adding a new production line at its steel plant in Berkeley County, S.C. The company recently opened a new mill in Kentucky, and it's building plants in Alabama and West Virginia.

"We see that strong ESG practices make for better businesses," says Lucas Moreno, a vice president at Argos USA, which has started making low-carbon cement in Alabama, West Virginia, South Carolina and Florida. "It has nothing to do with politics."

What is ESG?

The idea behind ESG is that investors stand to make more money over the long term if they know how companies are dealing with risks and opportunities that aren't accounted for in traditional financial models. They're trying to understand what companies are doing to make themselves more sustainable, especially as disruptions from climate change grow.

If drought is threatening a body of water that manufacturers rely on for cooling their machines or for shipping goods, for example, how are they going to protect their operations? And how are companies responding to growing consumer demand for greener products?

ESG proponents say it isn't perfect, and that it isn't a substitute for government action to deal with climate change. Companies have been accused of misrepresenting their environmental records, a practice known as greenwashing. And the strategies that investment firms use to act on corporate ESG data aren't well understood.

Those shortcomings have made ESG "a very easy whipping horse" in American politics, says Tensie Whelan, who runs the Center for Sustainable Business at New York University.

When Republicans took control of the U.S. House of Representatives in January, they promised a crackdown on corporate ESG practices. Rep. Andy Barr, a Kentucky Republican and senior member of the House Financial Services Committee, has called ESG a "cancer in our capital markets" that activists are using to try to starve fossil fuel companies of money.

The criticism has led some investors to talk less in public about their ESG initiatives, and some insurance companies have quit an industry group originally created to drive down emissions.

But industrial companies like Nucor say they're pushing ahead with their climate plans.

"For the industrial sector, many of these sustainability issues are existential," Whelan says. Companies are trying to mitigate risks from things like drought and volatile fossil fuel prices, she says, while also capitalizing on new business opportunities.

Executives and analysts say industrial companies are responding first and foremost to the demands of customers, who in many cases have climate targets of their own that will be hard to achieve without greener raw materials and supply chains.

That's creating competitive pressure to cut emissions.

"We think that now the expectation is that companies are going to run sustainably, products are going to have a strong sustainable component to them," says Evan van Hook, the chief sustainability officer at Honeywell.

There's no easy way to clean up steel manufacturing

Nucor likes its odds in that environment. By 2030, the company says a metric ton of its steel will have a carbon footprint that's about 80% smaller than today's industry average. After that, it aims to get as close to zero emissions as possible.

"One of the things that's a big emphasis and market opportunity for companies like Nucor is the green and digital economy needs to be made with steel, and the steel that it's made with matters," says Murphy, the Nucor executive.

"It's somewhat pointless to build a solar array if you're going to build it with steel and other materials that aren't sustainable," Murphy adds. "So let's bring those products to the U.S., and let's do it with some of the cleanest steel available."

But making green steel isn't easy. About 70% of global steel production still relies on a type of coal to melt iron ore. The International Energy Agency (IEA) says that to avoid the worst impacts of climate change, the steel industry will likely need new technologies to cut emissions, like hydrogen to replace fossil fuels, and carbon capture and storage to strip away some of the industry's remaining emissions before they leave smokestacks and bury them deep underground.

In 2021, a Swedish company called HYBRIT shipped the first batch of steel manufactured without fossil fuels. Since then, the number of projects that are being built to produce steel without carbon emissions has grown, according to the IEA. But the agency said last year that the pipeline of projects was still short of what's needed to dramatically cut the industry's emissions.

Nucor says any steel it makes can be certified as "net-zero" carbon. That means all of the emissions that are generated during manufacturing are canceled out by credits Nucor gets buying renewable energy, and by carbon offsets, which companies get in exchange for investing in things like forest preservation.

Nucor says it's looking at every option to cut emissions

Inside Nucor's factory in Berkeley, S.C., the path to greener steel still looks like heavy industry.

Barges deliver scrap steel to the plant, where it's loaded into giant buckets and ferried through a cavernous building to furnaces that resemble cauldrons. Soot is everywhere. Workers in hardhats sit behind bulletproof glass in a control room overlooking the melt shop. As the lid of one of the furnaces pulls back, the inside glows molten orange. The bucket swings over, a trap door opens and 130 tons of scrap metal crash down. Then an electrode drops into the furnace, and the melt shop booms as electricity liquifies the scrap and iron.

"We're generating a lightning bolt," says Robert Yap, who works at the plant, as a monitor shows the temperature inside the furnace approaching 3,000 degrees Fahrenheit.

Making lightning to melt scrap steel and iron requires a huge amount of electricity. The plant uses about 2% of South Carolina's power. And a red phone in the control room has a direct line to the local utility in case power plants malfunction, and Nucor needs to shut off its furnaces to reduce demand on the electric grid.

But by melting recycled steel in furnaces that run on electricity, companies like Nucor can quickly cut some of their emissions, since a lot of power plants that run on fossil fuels could be replaced by other technologies, like solar power and batteries to store electricity.

Nucor has been signing contracts with renewable energy projects, and it's pushing local utilities to close their coal-fired power plants. It has also invested in a company called NuScale Power, which recently had its design for a small modular nuclear reactor certified by the Nuclear Regulatory Commission.

Nucor is also looking for more sustainable raw materials — the company invested in a startup called Electra that's trying to make carbon-free iron — and it plans to capture and store emissions from an iron plant in Louisiana.

The company says it's pulling every lever it can to meet its climate targets. A machine Nucor built behind the plant in South Carolina is designed to shrink its carbon footprint by removing copper from mountains of scrap steel it ships in. Traditionally, iron's blended with the recycled metal to dilute the copper in a finished steel coil or I-beam. But making iron produces a lot of carbon. So pulling copper out before the scrap heads to a furnace could be a way to bring down emissions.

"We don't necessarily see a pathway to get to absolute zero today," Murphy says, "but we think we can get really, really close."

Someone has to pay for sustainability

One of the GOP's complaints about ESG is that it forces companies to do things that distract them from trying to make as much money as possible for their shareholders. But Nucor's focus on cutting emissions doesn't seem like it's a drag on the company's bottom line.

Last year, Nucor posted record profits of $7.61 billion. And its steel was voted the "coolest" thing made in South Carolina, beating out a fighter jet in an online contest hosted by the South Carolina Manufacturers Alliance. The award was announced at the Statehouse by South Carolina Gov. Henry McMaster, a Republican.

A spokesperson for Loftis, South Carolina's Republican treasurer and an outspoken critic of ESG, said in a statement that Loftis is proud of companies in the state that are making greener products and working to limit climate change. But Loftis believes the goals of ESG "align perfectly with [a] progressive social agenda to undermine the American way of life and take away our economic freedoms," the spokesperson said.

Murphy says that Nucor is just trying to build a durable business. "Sustainability is something that's here to stay," he says. "I really think we've moved beyond it being sort of administration specific. I think the world is recognizing that we need to evolve."

The question is whether customers will be willing to pay a premium for the green products they say they want. Steelmaker ArcelorMittal has said making carbon-free steel would cost up to 20% more than conventional methods.

Moreno of the cement maker Argos says sticker shock has left many customers looking for products that might have fewer emissions, but not zero.

"If you were to charge the full cost of what you could incur to be very green, I think that's when customers go, 'Wait a minute — do you have [a product] that's just a shade of green, not full green?'" Moreno says.

That's a problem because the world is running out of time to keep temperatures from rising to levels that could be disastrous for people and critical ecosystems. The Earth is already nearly 2 degrees Fahrenheit warmer than it was in the late 1800s, and it's on track to exceed 5 degrees Fahrenheit of warming by the end of the century, according to a recent report from the United Nations. Beyond about 2.8 degrees Fahrenheit of warming, storms, heat waves and other climate impacts become much more destructive.

So far, Nucor has announced deals to sell its "net-zero" steel to General Motors and Trane, which makes air conditioners and furnaces.

"What I would say is, yes, we're seeing a premium," Murphy says. "But I think the appetite for a premium really varies widely."