FCA follow up letter outlining developments and concerns about sustainability-linked loans market

On 14 August 2025, the Financial Conduct Authority (FCA) published a follow up letter to share insight from its ongoing engagement with banks active in the sustainability-linked loans (SLLs) market.

Since the FCA’s previous letter in 2023, which highlighted concerns on market integrity, credibility, incentives and conflicts of interest, the FCA have welcomed constructive engagement with banks active in this market. As part of the Government’s Financial Services Growth and Competitiveness Strategy, the SLL market present opportunities for the transition to net-zero for the UK’s financial sector, being an important part of a bank’s transition finance toolkit.

Developments observed since 2023 included sustainability performance targets being more aligned to a borrower’s business model, the declassification of SLLs, how banks need to evolve their transition finance framework to distinguish SLLs in their targets (whether by default or outright exclusion from financing targets) and a shift towards a more client-focused approach for promoting SSLs when a client is deemed ready. The FCA notes there are still barriers preventing some borrowers from using SLLs which include the costs for SMEs financing through SLLs for developing an internal reporting framework or acquiring mandatory external assurance and the large loan sizes required.

Next steps

The FCA will work closely with the Transition Finance Council as it drives towards the Transition Finance Market Review’s recommendations to promote the competitive position of the UK as a transition finance hub.

The FCA will also continue to monitor the market and welcomes feedback and engagement on the matters raised in this letter.