On 29 June 2023, the FCA published a letter addressed to the Heads of ESG and Sustainable Finance for firms in the Sustainability-Linked Loans (SLL) market. The letter contains a review of the SLL market.

Earlier this year, the FCA 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 the FCA may be able to encourage further development of the SLL market as an important transition financing tool.

The letter summarises the FCA’s findings, which are:

• 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 the FCA spoke with 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.

The letter goes on to note that some of these issues have been addressed by the recently published revision of the Loan Market Association’s Sustainability-Linked Loan Principles (SLLP). There has been a positive reaction to these from the market and the FCA believes a broader adoption of the existing SLLPs would drive further growth.

The FCA will continue to monitor this market, as part of its 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.

Currently, the FCA has no plans to introduce regulatory standards or a code of conduct for this market, but it will reconsider if required by the market.