FCA outlines concerns about sustainability-linked loans market

On 29 June 2023, the FCA published a letter sent to the Heads of ESG and sustainable finance firms in the Sustainability-Linked Loans (SLLs) market.

The FCA engaged with stakeholders earlier this year to better understand the market's functioning and to determine what measures might improve the integrity of the SLL product.

The letter summarises the FCA's findings, which include:

• 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 update.
  
  
• Borrowers are concerned about unwelcome scrutiny if they miss performance targets. They may also consider the time and costs of doing an SLL against a more conventional loan.
  
  
• Market participants the FCA spoke to 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.

The letter notes that some of these issues have been addressed by the revision of the Loan Market Association's Sustainability-Linked Loan Principles. The FCA believes a broader adoption of the existing SLLPs would drive further growth. 

The FCA does not directly regulate the SLL market and currently has no plans to introduce regulatory standards or a code of conduct for the SLL market.

The FCA's press release is available here.