Embedding ESG in SMEs : The Roles of Social Capital, Organisational Learning and Environmental Dynamism

ABSTRACT Although environmental, social and governance (ESG) has become a defining benchmark for corporate sustainability, many small and medium‐sized enterprises (SMEs) continue to struggle to develop and embed effective ESG strategies because of resource constraints. Advancing ESG strategy requires more than tangible assets; it depends on how SMEs leverage network relationships and transform external knowledge into organisational learning capabilities. Drawing upon Social Capital Theory, the Knowledge‐Based View and Institutional Theory, this study develops and tests an integrated framework explaining how SMEs leverage network relationships to develop ESG strategies through organisational learning and ultimately improve competitive advantage. Using a two‐wave, time‐lagged survey of 200 Malaysian SMEs and partial least squares path modelling, the findings show that social capital significantly enhances organisational learning, which mediates its effect on ESG strategy, while environmental dynamism strengthens the relationship between organisational learning and ESG strategy. ESG strategy subsequently strengthens competitive advantage. An importance–performance map analysis further reveals that ESG strategy is the most influential driver of competitive advantage but remains underperforming, indicating considerable unrealised strategic potential. Environmental dynamism also emerged as an influential contextual factor, highlighting the importance of developing adaptive capabilities and strategic agility to respond effectively to increasingly dynamic business environments. The study advances ESG scholarship by integrating Social Capital Theory, the Knowledge‐Based View and Institutional Theory into a capability‐building framework and offers practical guidance for SMEs seeking to develop and embed effective ESG strategies to enhance long‐term competitiveness.