Green Scores, Golden Returns: ESG's Role in Shaping SME Financial Outcomes

Purpose: This study examines the effect of Environmental, Social, and Governance (ESG) performance on the financial outcomes and cost of capital in small and medium-sized enterprises (SMEs). Design/methodology/approach: Using a dataset of 227 SMEs from 2015–2020, the research employs multiple linear regression to assess the relationship between ESG scores, financial performance (ROA, ROE), and capital structure (WACC, CoE, CoD). Findings: Higher ESG scores are linked to improved financial performance and reduced cost of capital, showing that ESG practices positively influence SMEs’ financial health. Originality: This research uniquely focuses on the often underexplored SME sector, providing fresh insights into how ESG strategies can improve financial outcomes and optimize capital costs. Research limitations/implications: The study is limited to SMEs in specific regions and a five-year time frame. Future research could broaden the analysis across different regions or industries. Practical implications: Managers should prioritize ESG initiatives to enhance profitability and reduce financing costs. Investors can use ESG scores to better assess SME investment risk. Social implications: By integrating ESG practices, SMEs contribute to broader societal goals such as environmental sustainability and social responsibility, benefiting both stakeholders and communities.