A UK financial regulatory body has raised concerns about the sustainability-linked loans market, although it stopped short of introducing regulation.
Sustainability-linked loans (SLLs) aim to support economic activity and growth with interest rates linked to certain environmental goals, helping support the UK’s transition to net zero by 2050.
The Financial Conduct Authority (FCA), following an investigation with key stakeholders, uncovered several concerns with the market.
Issues included SLLs not realising their full potential, with further increased trust and transparency required to deliver wider uptake, as well as borrowers concerned about unwelcome scrutiny if they miss performance targets.
Additionally, the FCA found that science-based targets would improve integrity and reduce the threat of greenwashing, while there is a potential for banks to accept weaker targets and count the loans towards their sustainability targets.
“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,” said Sacha Sadan, director of ESG at the FCA.
“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,” Sadan added.
The FCA added that it will monitor the market, although it has no current plans to introduce regulatory standards or a code of conduct at this stage.