FCA outlines concerns with sustainability-linked loans market

FCA has published a letter to heads of ESG and sustainable finance, setting out its review of the sustainability-linked loans (SLL) market.

Interest rates in SLLs are linked to meeting certain agreed sustainability goals, and can help to support the UK’s transition to a net zero economy by 2050. FCA does not regulate this market, but wants to ensure that it works well and that market integrity is maintained.

Key findings from the review were as follows:

  • Not realising potential – while a number of banks are keen to promote SLLs, the market is currently not achieving its potential. Increased trust and transparency could deliver wider uptake.
  • Borrower concerns – borrowers are concerned about unwelcome scrutiny if they miss performance targets. They may also consider the time and costs of a SLL against a more conventional loan.
  • Market participants believe that a more prescriptive framework would improve market integrity and reduce the threat of greenwashing accusations. This could include more meaningful, science-based targets.
  • There is the potential for conflicts of interest if banks accept weak targets and count the loan as part of their sustainable finance quota.
  • Several banks are advocating for uniform disclosure and independent monitoring and verification of targets. This could include well disclosed targets aligned to borrowers’ published transition plans.

Some of the issues identified are addressed by the recent revision of the LMA’s sustainability linked loan principles (SLLPs). FCA notes the market’s positive reaction to these principles and believes that broader adoption of the SLLPs would drive further growth.

Laura Wiles