Green scores, golden returns: ESG’s role in shaping SME financial outcomes

PurposeThe purpose of this study is to examine 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/approachUsing a data set of 227 SMEs from 2015 to 2020, this research uses multiple linear regression to assess the relationship between ESG scores, financial performance (Return on Assets and Return on Equity) and capital structure (weighted average cost of capital, cost of equity and cost of debt).FindingsHigher ESG scores are linked to improved financial performance and reduced cost of capital, showing that ESG practices positively influence SMEs’ financial health.Research limitations/implicationsThis 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 implicationsManagers should prioritize ESG initiatives to enhance profitability and reduce financing costs. Investors can use ESG scores to better assess SME investment risk.Social implicationsBy integrating ESG practices, SMEs contribute to broader societal goals such as environmental sustainability and social responsibility, benefiting both stakeholders and communities.Originality/valueThis research uniquely focuses on the often-underexplored SME sector, providing fresh insights into how ESG strategies can improve financial outcomes and optimize capital costs.