The UK’s Financial Conduct Authority has warned of greenwashing in the sustainability-linked loan (SLL) market, outlining a series of market integrity concerns that it said could hold back a useful net zero transition financing tool.
Sustainability-linked debt relates to interest payments tied to the issuer’s achievement of specific sustainability targets. Lenders can show they are supporting sustainable economic activities while obtaining stable cash flows. Examples of sustainability-linked debt includes climate bonds or clean transportation loans.
The FCA noted that, despite an extended period of growth, the emergence of negative media coverage of the SLL market together with concerns about robustness of market integrity, led to a number of issues.
In the letter, signed by FCA Director of ESG Sacha Sadan, the FCA wrote: “A number of the issues identified have informed our observations about the possibility of potential risks to market integrity and suspicion of greenwashing in the context of SLLs.”
Integrity-related concerns included weak incentives in the sustainability-related terms of the loans, and low-ambition sustainability targets and indicators chosen for the loans.
The Financial Conduct Authority also noted some banks were providing remuneration incentives to promote SLLs in order to help achieve their sustainable finance targets, potentially leading them to accept weak Sustainable Performance Targets (SPTs) and Key Performance Indicators (KPIs) in the loan agreements.
Avoid greenwashing, increase market confidence
News that the FCA has observed greenwashing in sustainability-linked loan markets means banks and businesses will now need to provide evidence of their green impact to increase market confidence.
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