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 loan market.
The growing popularity of deals that tie borrowing costs to sustainability goals has raised concerns that banks and high-emitting companies are using these deals to boost their reputations without setting meaningful climate targets.
“Sustainability-related loans should include goals as good as those that companies publish in their climate transformation plans,” the FCA said in a letter to a few of the banks’ sustainability leaders.
The letter also warned of “more measures” that could be taken to improve the sector.
In response to the news, ClimateTech financial expert Lemonas Norica, CEO, Heavy Finance He said, “Sustainable loans play a crucial role in helping companies improve their green credentials, by introducing environmentally friendly policies around waste management and emissions reduction. However, organizations benefiting from such initiatives must have a clear plan of action with concrete measurable objectives.” successfully to ensure that the investment is used correctly.
“The rise of greenwashing threatens to undermine the reputation of the industry, so holding companies accountable for the use of green financing should be a key consideration moving forward,” Norica said.
In 2022, it was estimated that $244 billion in sustainability-related loans were issued across Europe, compared to $319 billion in the previous year, amid a broader market downturn, according to data from Dealogic.
In 2020, $123 billion of these loans were issued. While the FCA does not regulate the loan market directly, it does check that banks and principals act with integrity, and the Treasury asked 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 the penalties or bonuses that bankers add to the cost of capital create little incentive for their clients to achieve sustainability goals. This is because fines, which are usually less than twenty percentage points for borrowers with high credit ratings, and a third of a percentage point for low-rated loans, did not go up with interest rates. According to the FCA, it is very easy to achieve goals.
Two of the UK’s largest providers of sustainability-related loans, HSBC and Barclays, have committed to raising up to $1 trillion in sustainable financing and investment by 2030. Banks do not usually publish the terms of sustainability-related loans.