Trade watchdog The Monetary Conduct Authority (FCA) has written to banks that lend to UK corporations to warn them about “greenwashing” and “conflicts of curiosity” within the sustainable loans market.
The rising recognition of offers that hyperlink borrowing prices to sustainability targets has prompted fears that banks and high-emitting corporations use these to reinforce their repute with out setting significant local weather targets in place.
“Sustainability-linked loans ought to embrace targets pretty much as good as people who corporations publish of their local weather transition plans”, the FCA mentioned in a letter to a handful of banks’ sustainability leaders.
The letter additionally warned of “additional measures” that could possibly be put in place to enhance to the sector.
In response to the information, ClimateTech finance skilled Laimonas Noreika, CEO, HeavyFinance mentioned: “Sustainable loans play a vital function in assist companies enhance their inexperienced credentials, by introducing environmentally pleasant insurance policies round waste administration and decreasing emissions. Nonetheless, organisations benefitting from such initiatives ought to have a transparent motion plan in place with tangible targets that may be efficiently measured to make sure that the funding is getting used appropriately.
The rise of greenwashing dangers undermining the repute of the business, so holding companies to account round the usage of inexperienced funding needs to be a key consideration transferring ahead,” mentioned Noreika.
In 2022 it was estimated that $244bn of sustainability-linked loans had been issued throughout Europe, in contrast with $319bn the earlier yr, amid a broader market downturn, in keeping with information from Dealogic.
In 2020 there have been $123bn of such loans issued. Whereas the FCA doesn’t regulate the mortgage market instantly, it checks that banks and administrators act with integrity, and was requested by the Treasury on the finish of final yr to assist the UK attain web zero emissions by 2050.
A difficulty recognized within the letter to bankers is that punishments or rewards that bankers add to the price of capital create little incentive for his or her shoppers to fulfill sustainability objectives. It’s because penalties that are usually lower than a twentieth of a share level for debtors with excessive credit score rankings, and a 3rd of a share level for lower-rated loans haven’t risen with rates of interest. Targets are additionally too simple to fulfill, in keeping with the FCA.
Two of the most important suppliers of sustainability-linked loans within the UK, HSBC and Barclays, have every dedicated to boost as much as $1tn of sustainable finance and funding by 2030. Banks don’t usually publish the phrases of sustainability-linked loans.