The UK’s financial watchdog has written to banks warning them of its concerns about potential greenwashing in the sustainability-linked loans (SLL) market.

The market, which promises to support sustainable economic activity and growth, has grown markedly over the past five years.

However, director of ESG at the Financial Conduct Authority Sacha Sadan warned that while these loans are important financing tools for the transition to a low carbon economy, there are “some issues holding back more widespread adoption and market growth”.

The FCA carried out a review of the market finding that banks typically count SLLs towards their sustainable financing targets, even though a number of firms indicated that the classification of these loans varies considerably between institutions.

For example, one firm told the regulator that of 250 SLL transactions completed in 2022, only 30 per cent were deemed ‘fit for purpose’, and that in 50 per cent of cases, KPIs were not robust.

The authority said that there is a potential for conflicts of interest if banks accept weak targets and count the loan as part of their sustainable finance quota.

The FCA also revealed that there was a general sentiment in the banking industry that the 'relationship' may matter more than the borrower's sustainability credentials, with the former potentially disproportionately influencing a bank's decision to participate in the SSL.

The review suggested that borrowers are concerned about unwelcome scrutiny if they miss performance targets, perhaps putting them off choosing a SLL over a more conventional loan.

Several banks in the market have called for uniform disclosure alongside independent monitoring, including well disclosed targets aligned to borrowers' published transition plans.

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