Integrating Environmental, Social, and Governance (ESG) Practices into Sustainable Banking Governance: The Roles of Capacity Building, Green Competencies, Financial Technology, and Green Innovation in Advancing Sustainable Finance

The increasing emphasis on sustainable governance and Environmental, Social, And Governance practices has heightened the need for banks to strengthen internal mechanisms that support sustainable finance, particularly in emerging market contexts. The aim of this study is to examine the roles of capacity building, green competencies, and financial technology in shaping sustainable finance in small-capital banks. Survey data were collected from employees of small-capital banks classified under Indonesia’s capital-based bank grouping KBMI 1 and listed on the Indonesia Stock Exchange, and were analyzed using partial least squares structural equation modeling. The results show that capacity building has a significant positive effect on both green innovation and sustainable finance, highlighting the importance of organizational learning and human capital development. Green competencies positively influence green innovation but do not have a direct effect on sustainable finance. Financial technology has a significant positive effect on sustainable finance, whereas its effect on green innovation is not supported. In addition, green innovation does not directly influence sustainable finance and does not mediate the relationships between internal organizational drivers and sustainable finance. These findings demonstrate that sustainable finance in small-capital banks is advanced through Environmental, Social, And Governance-oriented governance mechanisms that prioritize internal organizational readiness and digital enablement. By clarifying how internal organizational capabilities translate Environmental, Social, And Governance practices into sustainable financial outcomes, this study contributes to the sustainability literature by providing context-specific evidence on governance pathways for advancing sustainable finance in emerging market banking systems.