The UK Financial Conduct Authority (FCA) has sent a letter to sustainability heads at banks, raising regulatory concerns over sustainability-linked loans (SLLs), as reported by the Financial Times on June 30. Earlier this year, the FCA launched a review of the sustainable loan market and identified issues such as greenwashing risks, conflicts of interest, and disclosure problems. Some banks were found to accept weak sustainability targets from borrowers to meet their internal sustainable finance goals, leading to conflicts of interest. The FCA also noted that penalties for borrowers failing to meet sustainability targets were not stringent enough.

The FCA noted the growing popularity of deals that link borrowing costs to sustainability targets. Around USD319bn of SLLs were issued across Europe in 2021, representing a significant increase from USD123bn in 2020. Last year, the SLL market contracted to USD244bn amid a broader market downturn. However, the FCA found that only a third of the assessed SLL transactions in 2022 were considered “fit for purpose,” and half were deemed “not robust.” The FCA expressed concerns that these market integrity issues could impede the widespread adoption of SLLs, which are important for financing the transition to a low-carbon economy. The FCA emphasized the need for SLLs to include targets equivalent to companies’ climate transition plans and hinted at potential implementation of “further measures” to address sector issues.

Sources:

https://www.ft.com/content/10c3e16b-d1c7-4f76-a2f8-b92d54b1e2a7

https://www.cityam.com/watchdog-raises-greenwashing-concerns-over-sustainable-loans-but-experts-question-need-for-hard-laws/

https://www.investmentexecutive.com/news/from-the-regulators/fca-flags-sustainable-finance-concerns/