Legal & Regulatory News

FCA outlines concerns regarding sustainability-linked loan (SLL) market

The FCA recently undertook an investigation to better understand the functioning of the SLL market. As part of this process, the FCA engaged with stakeholders to gather SLL market intelligence; determine what measures might improve the market integrity of the SLL product; and understand where the FCA might be able to encourage further development of the SLL market as an important transition financing tool.

The FCA has shared its findings in a published letter, and summarised its key findings as follows:-

• 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.
• 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 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.

It was noted that many of these key issues have been addressed by our recently revised LMA Sustainability-Linked Loan Principles (SLLP), which have received a positive response within the market. The FCA has outlined that they believe a wider adoption of the SLLP would drive further growth within the market.

In terms of next steps, the FCA highlighted it will continue its monitoring of the market as part of their more extensive work on transition finance and will consider further measures to support the transition finance ecosystem.

Click here to view the letter.

Click here to view our recently revised Sustainability-Linked Loan Principles.