(30 June 2023 – United Kingdom) The Financial Conduct Authority has written to banks that lend to UK companies to warn them about “greenwashing” and “conflicts of interest” in the sustainable loans market.
The growing popularity of deals that link borrowing costs to sustainability targets has prompted fears that banks and high-emitting companies use these to burnish their reputation without setting meaningful climate goals.
The FCA said sustainability-linked loans should include targets as good as those that companies publish in their climate transition plans, and warned of possible “further measures” to clean up the sector.
The FT revealed last month that the regulator has been interviewing bankers and borrowers about such loans and is considering whether to draw up a voluntary code of conduct for the space.
Last year $244bn of sustainability-linked loans were issued across Europe, compared with $319bn the previous year, amid a broader market downturn, according to data provider Dealogic. In 2020 there were $123bn of such loans 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.
One problem 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 — 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.
Bankers nonetheless have an incentive to do these deals as they count towards annual green financing targets, which are sometimes linked to executive pay, the FCA said.
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.