The FCA has addressed concerns over market integrity in the sustainability-linked loan (SLL) market, warning about potential greenwashing practices.
The SLL market has seen significant expansion due to interest payments being linked to the attainment of specific sustainability goals, and the flexibility for the use of proceeds for general corporate purposes. However, negative media coverage and market intelligence gathered earlier this year has led to the FCA expressing concern over the sector’s robustness.
FCA Director of ESG Sacha Sadan voiced several issues, including weak sustainability-related terms and low-ambition sustainability targets, which could risk greenwashing within the context of SLLs. Conflicts of interest were also flagged as banks may accept weak Sustainable Performance Targets (SPTs) and Key Performance Indicators (KPIs) due to their own remuneration incentives tied to promoting SLLs.
Furthermore, the FCA noted that financial decisions on SLLs were seemingly more influenced by relationships than by a borrower’s sustainability credentials. Despite not directly regulating the SLL market, the FCA plans to continue its market monitoring to consider the necessity of further measures for a robust transition finance ecosystem.
FCA Director of ESG Sacha Sadan said, “Sustainability-linked loans are important financing tools for the transition to a low carbon economy. However, there are some issues holding back more widespread adoption and market growth. We want to build trust and integrity in these products. We hope all market participants will consider carefully today’s findings as well as the existing principles published by the Loan Market Association.”
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