The UK’s Financial Conduct Authority has warned banks against greenwashing and conflicts of interest when making sustainability-linked loans, amid concerns that lenders are not setting clear climate goals. The regulator also warned it could take “further measures” to support transition finance.
Banks should strengthen the targets included in sustainability-linked loans and ensure that they are in better alignment with borrowers’ transition plans, the regulator wrote in a letter to the sustainability divisions of several banks on 29 June.
“Although we do not directly regulate this part of the market, we are keen to ensure that the sustainable finance market works well, and that market integrity is maintained,” the FCA wrote. The regulator was asked by the UK Treasury to help the country reach net zero emissions by 2050.
The FCA conducted a review in the spring and found that targets were too easy to meet, with one company saying it considered a third of its completed transactions “fit for purpose”, with half “not robust”.
Banks have also created little incentive for borrowers to meet sustainability goals, as penalties are too low and have not changed with the rise in inflation.
In some cases, the FCA found that banks felt maintaining a relationship with borrowers was more important than their sustainability credentials, affecting the bank’s decision to participate in the loan. In addition, the FCA stated it was concerned that remuneration linked to ESG financing targets could lead to a conflict of interest.
The FCA is the latest regulator to voice concerns about greenwashing in the financial industry. The Central Bank of Ireland and Germany’s banking regulator BaFin have recently warned they will increase scrutiny of sustainability credentials, while the EU’s sustainable finance regulatory framework is aimed at giving more transparency to investors and prevent greenwashing.
This page was last updated July 11, 2023
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