Sustainability as a signal: ESG engagement as a market-facing capability for SME competitiveness

Purpose This paper aims to investigate the relationship between environmental, social and governance (ESG) practices and the financial performance of small- and medium-sized enterprises (SMEs) through a sustainable marketing lens. It conceptualizes ESG engagement not merely as a compliance mechanism but as a strategic market-facing capability that enhances SME competitiveness by signaling credibility, legitimacy and differentiation in sustainability-conscious markets. Design/methodology/approach The analysis uses a firm-level panel data set of European SMEs, combining multidimensional ESG indicators with accounting-based financial metrics that capture market outcomes associated with competitive positioning, such as profitability and growth. The empirical strategy uses fixed-effects estimations to account for unobserved firm heterogeneity and uses lagged ESG variables to mitigate endogeneity concerns, providing a robust assessment of how sustainability signals translate into economic outcomes. Findings The results indicate a positive association between overall ESG engagement and SME financial performance, supporting the view that sustainability functions as a value-creating and competitiveness-enhancing mechanism. When disaggregated, the environmental component emerges as the primary driver of profitability and growth, suggesting that highly visible and tangible environmental signals are most effectively rewarded by the market. The social dimension shows a positive but less robust relationship, reflecting its role in building long-term relational capital, while governance practices do not display a statistically significant direct effect, likely due to their lower visibility as market signals in the SME context. Research limitations/implications The study is subject to data availability constraints typical of SME-level indicators and focuses on accounting-based measures. Theoretically, it contributes by distinguishing between market-visible and market-invisible sustainability dimensions and by urging a move away from aggregate ESG scores in SME research. Practical implications For SME managers, the findings suggest that ESG initiatives – particularly environmental ones – should be leveraged as strategic marketing and competitive positioning tools rather than being viewed as mere operational costs. Originality/value This study extends the ESG–performance literature to SMEs and highlights the importance of a disaggregated and context-sensitive approach to understanding how sustainability engagement supports competitive advantage in smaller firms.