The impact of bank lending on the environmental outcomes of urban development

Abstract

Financial institutions play an important role as financiers of development, yet little is known about the key players; what processes they employ, how they make decisions and whether the environmental outcomes of development feature in finance decisions. This paper provides some answers as to how banks perceive and deal with the environmental impacts of development drawing on the literature and a case study of development lending practices in Australia and Europe, in the pre-Global Financial Crisis era. The banks studied financed a diverse range of residential, commercial, and industrial, transport and social infrastructure developments through different schemes. The schemes used determined if and how environmental issues translated into financial risks and opportunities and impacted finance decisions. The banks relied heavily on development/planning or environmental approvals as well as assessments by non-environmental experts. Delays in obtaining approvals posed a significant risk to financiers and, consequently, to developers. Exposure to reputational risk was a major concern for the Australian bank, but fines for breaching environmental regulations were not regarded as a threat. Several recommendations are made to planning and environmental practitioners, regulators and banks on advancing practices that could improve environmental outcomes of urban development.