Business Model Innovation Under Institutionalized ESG Regulation: An Ontological Account of Paradox Closure

ABSTRACT Institutionalized environmental, social, and governance (ESG) regulation is reshaping how firms justify value, responsibility, and viability across industrial value chains. This paper examines how Corporate Sustainability Reporting Directive requirements enter business model innovation in SMEs embedded in five industrial value chains. Drawing on a 3‐year longitudinal qualitative study of 25 SMEs, the findings show that ESG was initially treated as an external layer associated with documentation, compliance, and customer demands. When translated into business model reasoning, ESG surfaced persistent tensions among economic, environmental, social, and governance logics. These tensions were frequently closed through sequencing, commensuration, deferral, and compliance‐oriented reasoning. Artifact‐mediated workshops were associated with moments of provisional copresence, while the wider analysis identified governance constraints arising from the separation of ESG responsibility and decision authority. Building on these patterns, the paper advances the abductively grounded proposition that assumptions embedded in dominant BMI frameworks may reinforce ontological closure under institutionalized ESG conditions. It introduces the E 2 SG Flower as an analytically grounded paradox‐navigation proposition whose effects and transferability beyond the studied industrial value chains require further empirical validation.