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Aligning lending practices with sustainability goals: The challenges facing banks

June 6, 2024

Why financial institutions must match environmental responsibility with fiscal prudence.

Bridge in the woods

With stakeholders scrutinising corporate contributions to environmental stewardship, financial institutions must match environmental responsibility with fiscal prudence.

Recent insights underscore the pivotal role of Environmental, Social, and Governance (ESG) criteria in reshaping perceptions of bank reliability and integrity among investors and customers alike. However, the journey towards sustainable finance remains a formidable challenge and imperative for the banking sector. 

Despite notable strides in green and sustainable financial markets, with the Commonwealth Bank working towards a target of directing $70 billion towards sustainable finance by 2030 and ANZ aiming for $50 billion by 2025, such ventures constitute just a fraction of the overall market across various asset classes.

Emerging data from the Australian Securities & Investments Commission (ASIC) shows a shift in investor preferences, with an overwhelming majority expressing a desire for investments that yield positive societal impact alongside financial returns. As the global sustainable investment market hurtles towards a projected worth of $30 trillion USD by 2030, revelations from recent studies show the critical need for Australian banks to reassess their lending portfolios, with approximately $260 billion in outstanding loans (22% of bank lending) representing sectors with a high risk of ecological impact. 

The imperative of sustainable lending

The significance of sustainable lending extends far beyond corporate social responsibility. It's a strategic imperative for Australian banks seeking to secure their long-term viability. Embracing sustainable lending practices—like offering green mortgages, green loans, and sustainability-linked supply chain finance and loans—offers a number of opportunities for banks, including: 

Mitigating environmental and social risks

Environmental degradation and social inequality loom large, so banks face substantial risks from projects with adverse impacts. Sustainable lending practices serve as a shield against these risks, directing capital towards projects that adhere to stringent environmental, social, and governance (ESG) standards, yielding up to 4.5% higher total returns for shareholders.

Enhancing reputation and brand value

In an era of heightened transparency and accountability, a bank's reputation is its most valuable asset. By demonstrating a commitment to sustainability, banks can not only attract environmentally and socially conscious customers, but also bolster their brand value, earning the trust and loyalty of stakeholders.

Meeting stakeholder expectations

From shareholders to regulators to the broader community, stakeholders increasingly expect banks to demonstrate leadership in sustainability. Aligning lending practices with sustainability goals is essential for banks to meet these expectations and maintain their social licence to operate. 

Related: Unlocking value: The business case for disclosing emissions for Australian financial institutions

The challenges of sustainable banking

While the benefits of sustainable lending are clear, Australian banks face a host of challenges when translating aspiration into action. Some of these challenges include:

A lack of standardised sustainability criteria

One of the primary hurdles confronting Australian banks is the absence of standardised sustainability criteria to evaluate lending opportunities. 

Without clear and universally accepted guidelines, banks face difficulties in consistently assessing the environmental, social, and governance (ESG) aspects of potential investments. This lack of defined criteria not only complicates decision-making processes, but also raises concerns regarding risk management and alignment with broader sustainability objectives. 

Limited availability of emissions data 

The limited availability of emissions data poses a significant barrier to effective sustainable lending. Access to reliable data related to emissions and science-based reduction targets is crucial for banks to accurately evaluate the environmental and social risks associated with potential investments. However, in many instances, such data is either scarce, incomplete, or inconsistent, particularly concerning financed emissions—a critical factor in assessing carbon footprints. 

The scarcity of comprehensive ESG data undermines banks' abilities to make informed decisions and adequately manage sustainability-related risks in their lending portfolios, however given the proliferation of carbon emissions accounting technology, advances in data collection, and regulatory frameworks assisting in collecting and uniform data, this is becoming less of a challenge. 

Trouble balancing financial returns with sustainability objectives

While sustainable initiatives offer numerous long-term benefits, including risk mitigation and reputation enhancement, they often entail higher upfront costs or yield lower short-term returns. This inherent tension between profitability and sustainability poses a significant dilemma for banks operating within profit-driven models. 

Striking the balance between financial imperatives and sustainability goals requires innovative approaches, and a willingness to explore new business models that prioritise environmental and social outcomes alongside financial performance. 

According to findings from a 2023 study on ESG and global investor returns, companies with higher ESG ratings generally outperform those with lower ratings, with companies labelled as ESG ‘leaders’ experiencing an average annual return of 12.9% over the nine-year period, compared to 8.6% for companies labelled as ‘laggards’.

Related: Why ESG data governance is a crucial imperative for banks

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Overcoming these challenges 

Aligning with regulatory advice and frameworks 

Regulatory and compliance requirements play a pivotal role in shaping sustainable lending practices in Australia. In recent years, regulators have intensified their focus on integrating sustainability considerations into the financial sector, imposing stricter reporting and disclosure requirements on banks regarding their ESG performance. 

Regulatory bodies such as the Taskforce for Nature-related Financial Disclosures (TNFD), ASIC, and even the Federal Government are all doing their bit to assist Australian banks in aligning their lending practices with sustainability goals. 


Established in June 2020, the TNFD was formed to introduce a voluntary framework facilitating the management and disclosure of nature-related risks by companies and financial institutions. Its overarching objective is to encourage a transition in global financial flows, redirecting them from 'nature-negative' impacts towards 'nature-positive' outcomes.

The Taskforce on Nature-related Financial Disclosures (TNFD) is closely related to the Task Force on Climate-related Financial Disclosures (TCFD), which disbanded after fulfilling its remit and is now monitored by the IFRS. While the TCFD concentrated on climate-related risks, the TNFD extends this focus to encompass broader nature-related issues, including biodiversity loss and ecosystem degradation, providing a more comprehensive view of environmental risks.

The Sustainable Financing Strategy

The Federal Government in Australia is developing the Sustainable Financing Strategy, which aims to strengthen the nation's financial resilience to climate change. 

The strategy centres on three core pillars. Under Pillar 1, efforts are directed towards enhancing transparency by instituting frameworks for sustainability-related financial disclosures, developing a Sustainable Finance Taxonomy, and introducing labelling mechanisms for sustainable investment products. Pillar 2 focuses on strengthening the financial system's ability to adapt, encompassing initiatives such as enhanced market supervision, identification and mitigation of systemic financial risks, and ensuring regulatory frameworks remain relevant. Pillar 3 outlines the government's commitment to leading by example through the issuance of sovereign green bonds and advocating for sustainable finance globally. 

ASIC’s crackdown on greenwashing 

In response to mounting concerns regarding greenwashing within the financial sector, the Australian Securities & Investments Commission (ASIC) has intensified its scrutiny over sustainability-related disclosures, signalling a proactive stance on combating deceptive practices. 

Make use of evolving technologies 

Technology emerges as a key driver for overcoming the hurdles hindering sustainable lending practices. Advanced analytics and machine learning algorithms empower banks to analyse vast amounts of ESG data, facilitating more informed decision making and risk assessment. Blockchain technology holds promise for enhanced transparency and traceability in supply chains, ensuring that financed projects adhere to rigorous sustainability standards.

Sustain.Life is at the forefront of this technological advance, facilitating rigorous evaluations of potential investments' sustainability performance and streamlining accounting and disclosure processes. By automatically measuring scope 1 and 2 emissions, as well as value chain emissions (scope 3) from existing data sources, Sustain.Life ensures proper carbon accounting.

Beyond carbon accounting, Sustain.Life enables banks to identify risks and opportunities associated with sustainable projects and investing. Through these capabilities, Sustain.Life fosters collaboration and knowledge-sharing among stakeholders, propelling an easier transition towards more sustainable lending practices.


1. The Treasury, “Sustainable Finance Strategy”, Accessed June 6, 2024

2. Herbert Smith Freehills, “Exploring Sustainable Finance in Australia: A 22/23 Snapshot”, Accessed June 6, 2024

3. Reserve Bank of Australia, “Green and Sustainable Finance in Australia”, “ Accessed June 6, 2024

4. Australian Securities & Investments Commission, “ASIC’s current focus: What are the regulator’s expectations on sustainability-related disclosures?”, Accessed June 6, 2024

5. Australian Securities & Investments Commission, “ESG: Major change is underway, and we need to be ready”, Accessed June 6, 2024

6. Ernst & Young, “Banking for nature: Aligning Australian banking with the Global Biodiversity Framework”, Accessed June 6, 2024

7. Accenture, “Sustainable lending: An action plan for banks”, Accessed June 6, 2024

Editorial statement
At Sustain.Life, our goal is to provide the most up-to-date, objective, and research-based information to help readers make informed decisions. Written by practitioners and experts, articles are grounded in research and experience-based practices. All information has been fact-checked and reviewed by our team of sustainability professionals to ensure content is accurate and aligns with current industry standards. Articles contain trusted third-party sources that are either directly linked to the text or listed at the bottom to take readers directly to the source.
Jackson Burnie
Jackson Burnie is Sustain.Life’s director and country lead for APAC.
Joel Hanna
Joel Hanna is Sustain.Life’s customer success and enablement manager for APAC.
The takeaway

The challenges of sustainable banking

1. Lack of standardised sustainability criteria
2. Limited availability of emissions data 
3. Trouble balancing financial returns with sustainability objectives