The Financial Conduct Authority (FCA) reflects on the state of the Sustainability-Linked Loans market after two years

The Financial Conduct Authority (FCA) reflects on the state of the Sustainability-Linked Loans market after two years

In a recent development, the Financial Conduct Authority (FCA) has published a follow-up letter to provide insights into the ongoing engagement with banks active in the Sustainability-linked loans (SLLs) market. While specific details from the FCA's follow-up letter itself are not readily available, the broader SLLs market since 2023 has shown significant progress.

Financial institutions like NatWest have accelerated their sustainability financing commitments, pledging £200 billion in climate and sustainable finance by 2030. This commitment aligns with science-based climate goals and ESG criteria, reflecting a broader expansion of sustainable finance products, including loans linked to environmental performance targets.

Banco BPM, on the other hand, has seen growth in SLLs targeted particularly at Small and Medium Enterprises (SMEs), alongside a growing portfolio of green loan products aligned with EU environmental objectives and taxonomy criteria. These loans come with client reporting obligations and are subject to ESG due diligence by third parties, suggesting enhanced market infrastructure and governance practices around SLLs.

Other institutions, such as the Islamic Development Bank, are integrating climate considerations into lending frameworks, emphasizing the exclusion of fossil fuel assets and focusing on climate-resilient projects aligned with global net-zero and sustainability agendas.

The sustainable loan portion of loan portfolios is also growing. For instance, Íslandsbanki reported 15% of its banking book consisting of sustainable loans by mid-2025, evidence of increasing market penetration of loans tied to sustainability performance.

These trends indicate that the SLLs market since 2023 is expanding in scale and sophistication, with growing commitments towards climate-aligned and ESG-linked financing, increasing product offerings, enhanced regulatory and risk management integration of ESG criteria, and a rising share of sustainable loans within overall loan portfolios.

The FCA's new strategy for the years 2025 to 2030 aims to support the growth of the financial services sector and the UK economy. The strategy aligns with the Government's ambitions for the UK and focuses on channeling capital towards managing the risks and opportunities of the transition to net zero.

SLLs remain a useful transition financing tool for borrowers aiming to improve their overall sustainability performance. However, there are still barriers to scaling the SLL market and concerns around incentives. The FCA encourages banks to engage collaboratively with the Transition Finance Council's work to build alignment in approaches to transition finance.

The FCA will continue its constructive dialogue with banks regarding SLLs and transition finance, and will continue to monitor the SLLs market as part of its work on transition finance. The insights from the follow-up letter aim to help a wider group of firms in the SLL market.

Despite the lack of specific details from the FCA's follow-up letter, the improvements observed in the SLL market are important steps in the development of a credible transition finance ecosystem. Since the 2023 letter, the market for SLLs has matured, with better practice and more robust product structures. The FCA's strategy does not specify any new initiatives or policies for the SLL market, but the continued dialogue and monitoring suggest a commitment to its growth and development.

1. The FCA's ongoing engagement with banks active in the Sustainability-linked loans (SLLs) market aligns with their strategy to support the growth of the financial services sector, channeling capital towards managing the risks and opportunities of the transition to net zero in line with the Government's ambitions for the UK.
2. Financial institutions, such as NatWest, Banco BPM, the Islamic Development Bank, and others, have expanded their sustainability financing commitments and product offerings, including loans linked to environmental performance targets, reflecting a broader expansion of sustainable finance products in the market.
3. Science-based climate goals and ESG criteria are increasingly influencing financing decisions, as shown by the growing commitments towards climate-aligned and ESG-linked financing, the rising share of sustainable loans within overall loan portfolios, and the growing focus on climate-resilient projects.

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