The green social contract among firms, institutions, and community

What motivates small-and medium-sized enterprises (SMEs) to engage in environmental practices? Existing studies mainly distinguish between internal and external economic drivers of firms’ green behaviour. However, economic factors alone may provide only a partial explanation, as firms’ environmental decisions are also shaped by the broader social context in which they operate. In this paper, we examine how three key contextual actors – state, market, and community – influence SMEs’ provision of green products and services, and whether their interaction reflects the existence of a Green Social Contract between firms and society from a neo-institutionalist perspective. Using Eurobarometer survey data on SMEs combined with datasets on citizens’ eco-social attitudes and countries’ institutional and economic characteristics, the analysis shows that SMEs’ green behaviour is strongly shaped by contextual factors. Formal institutional quality has a positive and significant effect, while peer market pressure and community engagement promote firms’ green behaviour and can also partially compensate for weaker formal institutions. These findings highlight the importance of policies that encourage competition and transparency among firms and strengthen citizens’ environmental and social awareness to promote the provision of green products and services by SMEs.