Sustainability-linked loans are supposed to facilitate the transition to a low-carbon economy, but a review by the U.K.’s Financial Conduct Authority (FCA) finds an array of regulatory concerns, including greenwashing risks, conflicts of interest and disclosure issues.
At the behest of government policy-makers, the FCA reviewed the sustainable loan market earlier this year. On Thursday, it set out the findings of that review, detailing market integrity issues that may inhibit the sector’s development due to a lack of trust and confidence in these vehicles.
“Sustainability-linked loans are important financing tools for the transition to a low-carbon economy,” Sacha Sadan, director of ESG with the FCA, said in a release. “However, there are some issues holding back more widespread adoption and market growth.”
Among other things, the regulator found that conflict of interest concerns arise with banks seeking to meet their internal sustainable finance goals by accepting weak sustainability targets from borrowers.
At the same time, borrowers are reluctant to accept tough targets for fear of facing unwelcome scrutiny if they fail to hit those targets.
Both borrowers and lenders are also worried about greenwashing allegations.
“Market participants that we spoke to believe that a more prescriptive framework would improve market integrity and reduce the threat of greenwashing accusations,” the FCA said in a release. “This could include more meaningful, science-based targets.”
“Several banks are advocating for uniform disclosure and independent monitoring and verification of targets,” it said. “This could include well-disclosed targets aligned to borrowers’ published transition plans.”
Given the market integrity concerns, the sustainability-linked loan market is not realizing its potential, the FCA said.
“Increased trust and transparency could deliver wider uptake,” it suggested.
At this point, the FCA is not proposing any new regulation for the market.
“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,” it said.