How Stakeholder Engagement Drives Environmental Innovation to Mitigate Climate Change: Evidence From European Small Caps

ABSTRACT Climate change poses several challenges for ecosystems and business operations, prompting scholars, practitioners and policymakers to seek novel solutions. This paper focused on a sample of listed companies on the STOXX Europe Small 200 index and examined the interplay between stakeholder engagement and environmental innovation across 9 years (i.e., 2015–2023). By single‐mediator models through ordinary least squares (OLS) regression and path analysis, we ran a mediation analysis to assess the Corporate Social Responsibility (CSR) committee and the environmental management team as mediators of the baseline relationship. Drawing upon an Integrated Theoretical Framework, combining Stakeholder Theory (SKT), Knowledge‐Based View (KBV) and Stewardship Theory (SWT), our empirical evidence showed that increased stakeholder engagement is positively associated with higher levels of environmental innovation activities, possibly suggesting that small‐cap firms mitigate climate risks by further engaging with their stakeholders. Still, the mediating factors at both the management and board levels positively mediate the aforementioned relationship. Overall, our findings contribute to the broader academic debate on climate change management, providing novel insights to understand how companies can navigate climate change‐related risks.