FCA publishes letter on sustainability-linked loan market

On 14 August, the UK’s Financial Conduct Authority (FCA) published a letter detailing its insights following engagement with banks active in the sustainability-linked loan (SLL) market (the 2025 Letter). This follows the FCA’s previous letter on the SLL market published in 2023 (the 2023 Letter), which highlighted its concerns around greenwashing and the lack of credibility and integrity in the SLL market, as well as the perceived absence of incentives for borrowers to seek SLLs and potential for conflicts of interest. In this blog post, we have summarised the key themes and observations from the 2025 Letter.

Credibility and integrity

In its 2023 Letter, the FCA flagged its concerns around greenwashing and criticised the lack of credibility and integrity in the SLL market. It had also previously noted that some SLLs were poorly structured, with some key performance indicators (KPIs) and sustainability performance targets (SPTs) being badly designed and of low ambition. 

In its 2025 Letter, the FCA acknowledges that the SLL market has matured over the past two years, with increasingly robust product structures, including KPIs that are now generally more relevant to the borrower. The market has also moved from setting numerous, unrelated SPTs to setting a small number of material and strategically significant SPTs. There has also been an increase in the prevalence of multiple sustainability coordinators across syndicated SLLs, which the FCA notes can increase the scrutiny and ambition of KPIs and SPTs at the structuring stage. 

The 2025 Letter goes on to observe that some banks are supporting borrowers to set more challenging targets throughout the life of an SLL, as well as at the point of refinancing. Additionally, the FCA notes that where borrowers breach an SLL, banks are increasingly willing to use the declassification mechanics, showing that standards have been raised. 

The SLL Principles, published by the Loan Market Association and its sister trade associations, are referenced in both the 2025 and 2023 Letters as raising the baseline standards in the SLL market and providing clarity on SLL criteria. 

Articulation of SLLs in banks’ sustainable financing targets

In the 2025 Letter, the FCA expresses concerns over a lack of clarity in the way banks communicate how they account for SLLs in their sustainable financing targets, as this can expose banks to reputational risk and reduce trust in their SLL offerings. Although the FCA does not prescribe how SLLs should be classified in banks’ sustainable financing targets, it notes that their approach should be described clearly and that banks need to demonstrate how and why SLLs are included in these targets, e.g. through a sustainable financing framework. 

Incentives and conflicts of interest

Conflicts of interest was another theme raised in the 2023 Letter, with the FCA previously noting that banks were keen to promote SLLs in order to achieve their sustainable financing targets, which could lead to them prioritising the product over client readiness, posing a threat to the integrity of the SLL market. 

In the 2025 Letter, the FCA notes that a greater number of missed SPTs can be seen as a positive indication that the SLL market is maturing and that the targets set are sufficiently ambitious and observes a positive shift in approach from the banks in this regard, with some banks refusing to take mandates in structuring certain SLLs, e.g. because the proposed targets are unambitious or immaterial to the borrower. Nevertheless, the FCA recommends that banks continue to be alert to potential conflicts of interest.

The FCA had also previously observed that incentives for borrowers to seek an SLL were low, given the marginal benefits on borrowing costs being outweighed by the costs of developing and complying with the SLL’s reporting framework and acquiring mandatory external assurance. This continues to be a challenge (as set out in our previous briefing), with borrowers weighing up the de minimis margins for meeting (or missing) SPTs and the potential reputational risk that comes with the disclosure of missed SPTs, and a continuing decline of global SLL issuances since 2023, per data from Environmental Finance, indicating that there are still barriers to scaling the SLL market.

Barriers preventing SMEs accessing SLLs

The FCA notes that the costs of developing an internal reporting framework, acquiring advice and external assurance, and the typically large loan sizes required, can act as a barrier to small to medium enterprises (SMEs) seeking financing through SLLs. The FCA encourages banks to support clients in developing capacity should they seek to commit to sustainability improvements through an SLL. 

Conclusion

Although the 2025 Letter focuses on the SLL market, it also references the link between SLLs and transition finance, including how improving the integrity and increasing the scale of the SLL market is a crucial step in developing a credible transition finance ecosystem. SLLs are an important part of a bank’s transition finance toolkit, given they are increasingly used to complement other instruments and help clients improve their overall sustainability performance, which can include clients operating in high-emitting or hard-to-abate sectors.

The 2025 Letter demonstrates that SLLs have matured since the publication of the 2023 Letter and signals the FCA’s cautiously optimistic view of progress that has been made. It also highlights the FCA’s and other market participants’ continued focus on driving credibility, trust, and accessibility in the SLL and sustainable/transition finance markets during a period where market momentum appears to have wavered.