Industry watchdog The Financial Conduct Authority (FCA) has written to banks that lend to UK companies to warn them about ‘greenwashing’ and ‘conflicts of interest’ in the sustainable loans market.
The rising popularity of deals that link borrowing costs to sustainability targets has prompted fears that banks and high-emitting companies use these to enhance their reputation without setting meaningful climate targets in place.
“Sustainability-linked loans should include targets as good as those that companies publish in their climate transition plans”, the FCA said in a letter to a handful of banks’ sustainability leaders.
The letter also warned of “further measures” that could be put in place to improve to the sector.
ClimateTech finance expert Laimonas Noreika, of HeavyFinance, said: “Sustainable loans play a crucial role in help businesses improve their green credentials, by introducing environmentally friendly policies around waste management and reducing emissions. However, organisations benefitting from such initiatives should have a clear action plan in place with tangible targets that can be successfully measured to ensure that the investment is being used correctly.
“The rise of greenwashing risks undermining the reputation of the industry, so holding firms to account around the use of green funding should be a key consideration moving forward.”
In 2022 it was estimated that $244bn of sustainability-linked loans were issued across Europe, compared with $319bn the previous year, amid a broader market downturn, according to data from Dealogic.
In 2020 $123bn in loans were issued. While the FCA does not regulate the loan market directly, it checks that banks and directors act with integrity, and was asked by the Treasury at the end of last year to help the UK reach net zero emissions by 2050.
An issue identified in the letter to bankers is that punishments or rewards that bankers add to the cost of capital create little incentive for their clients to meet sustainability goals.
This is because penalties which are typically less than a 20th of a percentage point for borrowers with high credit ratings, and a third of a percentage point for lower-rated loans have not risen with interest rates. Targets are also too easy to meet, according to the FCA.
Two of the biggest providers of sustainability-linked loans in the UK, HSBC and Barclays, have each committed to raise up to $1tn of sustainable finance and investment by 2030. Banks do not typically publish the terms of sustainability-linked loans.