Abstract
This paper studies the impact financing by lending institutions and examines whether social impact financing practices benefit the lender’s financial performance. By utilising the COVID-19 pandemic as an exogenous shock to China’s stock market, we show that lenders with better integration of environmental impacts in their financing process experienced positive stock return changes in response to the pandemic shock. The positive effect of impact financing on the lender’s stock return reaction is up to approximately 1.43% and significant up to 5 trading days around the shock. We provide very first empirical evidence to support the notion that lenders can derive pecuniary utility from pursuing impact financing. Our findings advance the understanding of tensions between the multiple objectives for corporate sustainability and add insights to the discussion about what the objective function of financial institutions should be in achieving sustainability. The study also contributes to the nascent but fast-growing literature on impact investing, in particular, the investments made through impact financing.