ESG loan market now less marred by greenwashing: UK FCA
There are ‘better practice and more robust product structures’ for sustainability-linked loans now, says the authority’s director of ESG issues
TWO years after it warned of greenwashing risks in the market for sustainability-linked loans (SLLs), the UK’s Financial Conduct Authority (FCA) says banks and borrowers appear to have made meaningful improvements.
Sacha Sadan, the FCA’s director of environmental, social and governance (ESG) issues, said in a letter posted on the FCA’s website that, since its 2023 critique, the SLL market has developed “better practice and more robust product structures”.
He cited more appropriate targets and more clearly defined roles for the banks structuring such deals as examples of improvements.
Issuance of SLLs peaked in 2021 before sliding amid accusations of greenwashing and as interest in ESG strategies declined. Still, with close to US$2 trillion of issuance to date, SLLs continue to represent the second-biggest product category of sustainable debt after green bonds, according to data compiled by BloombergNEF.
SLLs are supposed to create incentives for corporate borrowers to reach ESG goals, such as cutting greenhouse gas emissions. Typically, a borrower is rewarded with lower interest costs if it reaches a stated target.
Noting that it does not directly oversee SLLs, the FCA said in 2023 it had concerns about the integrity of the market. The regulator called out potential conflicts of interest, a lack of trust and integrity and the low ambition and poor design of some SLLs’ key performance indicators.
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In his letter dated Aug 14, Sadan said the market “has shifted from numerous, disjointed” sustainability performance targets to two or three targets that are “material and strategically significant”.
Meanwhile, the KPIs that determine a borrower’s performance against its target “are now generally of greater relevance”, he said.
Sadan added that borrowers are also removing SLL labels from existing loans if they breach the terms, or if a loan no longer meets a bank’s criteria.
“There are still barriers to scaling the SLL market and concerns about incentives, but the improvements we observed are important steps in the development of a credible transition finance ecosystem,” he said.
“Raising standards can help establish SLLs as a viable instrument to support borrowers’ sustainability objectives, even if it may reduce volumes in the near term by filtering out poorly structured SLLs.”
Sadan also said he was aware some banks had “declined to support clients in structuring SLLs” when proposed targets seem “unambitious or immaterial to a borrower’s business model”.
He encouraged banks to “remain alert to potential conflicts of interest” given the “potential for client relationships to disproportionately drive a bank’s decision to provide an SLL to a client”.
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