UK regulator probes sustainable lending market

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The UK’s Financial Conduct Authority is surveying the market for sustainable lending, following concerns that the environmental targets in such deals are too easy for companies to achieve.

The watchdog has begun interviewing bankers and borrowers about loans that potentially reward borrowers with lower rates but don’t have a significant environmental impact. He is considering introducing a voluntary code of conduct setting out best practices for loan design.

The FCA, whose investigation has not previously been reported, is responding to growing industry concerns about the potential for so-called greenwashing, in which banks overstate their positive social and environmental impact to burnish their reputation.

$29.2 billion of sustainability-linked loans were issued in the UK last year, after raising $34.7 billion in 2021, according to data provider Dealogic, amid a broader market downturn . The total amounted to just over a tenth of the European total.

Companies that take out sustainability-linked loans are punished with higher interest rates on their payments if they fail to meet agreed targets. If they succeed, they are rewarded with lower rates.

“People are selling loans, but maybe they’re not doing it as well as they might with standards and transparency,” Sacha Sadan, director of Environmental, Social and Governance at the FCA, told the Financial Times. “The big concern is that we don’t end up getting to net zero even though we’re saying we are,” he added.

Such deals have become increasingly popular with borrowers as they respond to investor and staff pressure on environmental, social and governance issues.

A particular concern of the FCA is that companies use undisclosed targets for their sustainable loans that may be easier to achieve than other corporate targets that are usually made public. “To me the metrics should be similar to [those] the boss gets connected,” Sadan said.

ING, the Dutch bank, recently had to turn away a “major” client who tried to add a low-quality sustainability clause to a loan that ING had proposed to coordinate, said Jacomijn Vels, the bank’s global head of sustainable finance. ft. “We’re still very much in this process of becoming a mature market,” he said.

Vels added that so-called “dormant” sustainability-related loans, where targets aren’t added until the deal has been agreed, are increasingly common.

ING has some “dormant” loans on its books but isn’t counting them towards its annual green funding target of €125bn by 2025 until the clause, known as a loan “wake-up”, is added.

“The banks have all made these net zero commitments, so they need to frankly clean up their loan books. . . they are in promotion mode,” said David Milligan, partner at law firm Norton Rose Fulbright. Sustainability clauses are “one of the first questions” bankers ask when they conclude a loan agreement and are considered a “default option,” he added.

The FCA is also considering asking issuers of sustainability-related bonds to explain in investor materials how the goals fit into the company’s broader strategy.

The regulator said it had “concerns” that issuers were omitting key information from prospectuses, which could be “detrimental” and lead to “misunderstandings,” it said in a consultation document earlier this month.