The UK’s Financial Conduct Authority (FCA) says the global sustainability-linked loan (SLL) market has taken “important steps” to address credibility and integrity issues, positioning it as a more effective tool for financing the transition to net zero. For Africa, where sustainable finance remains a critical missing link in meeting climate and development targets, this evolution could open new pathways to unlock capital for green growth.
Sustainability-linked loans differ from green bonds in an important way. While green bonds require funds to be directed toward specific projects, SLLs tie financing terms such as interest rates, to the borrower achieving agreed sustainability targets, regardless of how the capital is ultimately used. This flexibility makes them attractive to a wide range of businesses, from renewable energy developers to agribusinesses, manufacturers, and logistics firms, especially in markets where project-specific financing can be hard to secure.
In 2023, the FCA raised serious concerns about the integrity of the SLL market. Its review pointed to sustainability targets that were too easy to meet, performance indicators that bore little relevance to a borrower’s core business, and conflicts of interest where banks were incentivised to approve weak targets to meet their own sustainable finance quotas. Such weaknesses risked undermining the credibility of SLLs, turning them into greenwashing tools rather than drivers of genuine climate action.
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The regulator’s latest update tells a more promising story. It reports that performance indicators are now more relevant and closely aligned to borrowers’ main operations, while borrowers themselves are narrowing their focus to a smaller number of ambitious sustainability performance targets that are strategically significant to their business models.
In syndicated SLLs, the involvement of multiple sustainability coordinators has become more common, creating more scrutiny and prompting more ambitious targets. Banks, too, are showing greater resolve in upholding standards, with some now willing to “declassify” loans that no longer meet SLL criteria when targets are breached. Although the pricing incentives tied to these targets remain modest, the FCA believes these structural improvements represent meaningful progress.
For Africa, this shift could not come at a better time. The continent faces an annual climate finance gap of more than $270 billion, according to the Climate Policy Initiative, with most current funding coming from public sources. Mobilising private capital is essential, but access to affordable financing remains a major hurdle, particularly for small and medium-sized enterprises in sectors such as clean energy, sustainable agriculture, water management, and low-carbon transport.
A more credible SLL framework could help bridge this gap by attracting international lenders to African markets with clearer and more transparent performance metrics, rewarding sustainability leaders with lower borrowing costs, and allowing diverse sectors to fund their growth without the constraints of project-specific bonds.
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Examples of African engagement with SLLs are beginning to emerge. In 2024, South Africa’s Nedbank arranged a sustainability-linked facility to support renewable energy developments, while Olam Agri leveraged the model to improve traceability and reduce emissions in its African commodity chains. These transactions remain rare, but they point to the potential of SLLs to fund projects that align with both commercial growth and sustainability commitments.
However, significant obstacles remain. Many African SMEs lack the internal capacity to develop credible ESG reporting frameworks, and the costs of obtaining external verification can be prohibitive. Minimum loan sizes required by international lenders often exceed what local businesses can absorb, and there is still limited technical expertise within African financial institutions for structuring and monitoring such facilities. Overcoming these challenges will require targeted capacity building, blended finance arrangements in which development banks share risk with commercial lenders, and policy incentives to make sustainability-linked borrowing more attractive.
As the African Union advances its Agenda 2063 goals and countries update their climate commitments under the Paris Agreement, flexible yet credible financing tools will be critical. The FCA’s findings suggest that the SLL market is maturing into just such a tool. For the continent, the opportunity now lies in adapting it to local realities—building the systems, skills, and partnerships that can turn sustainability-linked loans from a niche financial product into a central driver of the continent’s just and green transition.
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