FCA outlines concerns about sustainability-linked loans market
Sustainability-linked loans (SLLs) aim to support sustainable economic activity and growth, with interest rates linked to meeting certain agreed sustainability goals. It is hoped they can help support the UK
The FCA says it aims to support the UK’s commitment to create a net-zero economy by 2050, and has been asked by the Chancellor to reflect the government’s ambitions for the provision of sustainable finance. Although the FCA does not regulate this market directly, it says it wants to make sure the sustainable finance market works well and that market integrity is maintained.
The regulator engaged with stakeholders earlier this year to help it better understand the functioning of the SLL market, gather additional market intelligence, determine what
The FCA’s key findings were as follows:
- Although a number of banks are keen to promote SSLs, the market is not realising its potential and increased trust and transparency could deliver wider uptake
- Borrowers are concerned about unwelcome scrutiny if they miss performance targets. They may also consider the time and cost of an SLL compared with more conventional loans
- Some market participants believe a more prescriptive framework, potentially including more meaningful science-based targets, would improve market integrity and help avoid accusations of greenwashing
- There is the potential for conflicts of interest if banks accept weak targets and count the loan as part of their sustainable finance quota
- Some banks advocate uniform disclosure, independent monitoring and verification of targets. This could include well-disclosed targets aligned to borrowers’ published transition plans
- The recently published revision of the Loan Market Association’s Sustainability-Linked Loan Principles (SLLP) addresses some of these issues, meeting a favourable reactions from the market. The FCA believes broader adoption of the existing SLLPs would drive further growth.