Sustainability-linked loans (SLLs) aim to support sustainable economic activity and growth, with interest rates linked to meeting certain agreed sustainability goals. They can help to support the UK’s transition to a net zero economy by 2050.
Our work as a regulator has regard to the government's commitment to a net zero economy by 2050. The Chancellor has also asked us to have regard to the government's ambitions for the provision of sustainable finance.
Although we do not regulate this market directly, we want to ensure that the sustainable finance market works well, and that market integrity is maintained.
Earlier this year, we engaged with a number of stakeholders to: better understand the functioning of the SLL market; gather additional market intelligence on the SLL market from key stakeholders; determine what measures might improve the market integrity of the SLL product; and understand where we may be able to encourage further development of the SLL market as an important transition financing tool.
We are sharing our findings with these stakeholders and publishing the letter[2] so that all interested parties can reflect on its content.
Our key findings were as follows:
- Not realising potential - 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 uptake.
- Borrower concerns – 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 that we 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.
Some of these issues have been addressed by the recently published revision of the Loan Market Association’s Sustainability-Linked Loan Principles[3] (SLLP). There has been a positive reaction to these from the market and we believe a broader adoption of the existing SLLPs would drive further growth.
Sacha Sadan, Director of ESG at the FCA, commented:
'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.'
Next steps
We will continue to monitor this market, as part of our wider work on transition finance, with a view to considering the need for further measures to support the development of a robust transition finance ecosystem.
We have no current plans to introduce regulatory standards or a code of conduct for this market – but we will reconsider this if the market needs it.