The UK’s Financial Conduct Authority (FCA) has released a follow-up review of the sustainability-linked loans (SLLs) market, reaffirming that while challenges persist, the sector has shown appreciable progress since its inaugural assessment in 2023.
In its 2023 review, the FCA raised concerns over the integrity and credibility of SLLs—highlighting issues such as insufficiently ambitious sustainability targets, weak incentives, and potential conflicts of interest. Since then, through ongoing engagement with participating banks, the regulator has observed encouraging developments:
- Stronger and more relevant KPIs and SPTs: The market has shifted from broad, disjointed targets to focusing on two or three strategically significant and materially aligned Key Performance Indicators (KPIs) and Sustainability Performance Targets (SPTs) relevant to each borrower’s business.
- Increased use of sustainability coordinators: Syndicated SLLs increasingly involve multiple designated sustainability coordinators. By clarifying roles and encouraging robust debate during structuring, this trend is helping ensure more rigorous and ambitious target-setting.
- Declassification as a sanction for non‑compliance: Some banks have begun declassifying loans when borrowers breach sustainability-linked terms or fail to maintain eligibility criteria. This signals a willingness to uphold higher standards and enforce accountability.
Despite these improvements, the FCA notes ongoing constraints that hinder the scaling of the SLL market.Small and medium-sized enterprises continue to face affordability challenges related to internal reporting systems and external assurance services, limiting their access to SLLs.
As part of its broader Strategy 2025–2030, the FCA remains committed to nurturing the transition finance ecosystem and positioning the UK as a global hub for sustainable finance. The regulator plans to sustain its market monitoring, encourage collaboration—particularly via the Transition Finance Council—and promote consistency in transition financing approaches.
In summary, two years into its oversight of the SLL market, the FCA has recognised significant improvements in product structuring and governance. Nonetheless, affordability and scale remain key challenges—particularly for smaller borrowers. The regulator’s continued engagement and strategic oversight aim to support the credibility and broader adoption of sustainability-linked financing in the UK.
