ESG Reporting Practices in SMEs: A Systematic Literature Review of Motivations, Challenges, and Performance Links

2.1 Search strategy and information sources

The evidentiary foundation of this review rests upon a curated primary corpus comprising 20 specific peer-reviewed studies identified through prior expert consultation as seminal contributions to the SME ESG reporting discourse published between 2021 and 2026. To ensure the comprehensiveness of the review and to situate these core texts within the broader intellectual landscape, this primary corpus was augmented by a supplementary systematic search conducted across two premier multidisciplinary citation databases: Scopus and Web of Science Core Collection. These databases were selected due to their rigorous curation standards, comprehensive coverage of business, management, and environmental science literature, and their status as authoritative sources for bibliometric and systematic review research (Pranckutė, 2021). The search strategy was executed in March 2026 and employed a Boolean search string designed to capture the intersection of firm size and sustainability disclosure. The search query combined SME-related terminology with reporting-focused keywords using the following structure: TITLE-ABS-KEY ((“small and medium enterprise” OR “SME” OR “MSME”) AND (“ESG disclosure” OR “ESG report” OR “sustainability report*” OR “non-financial disclosure” OR “CSRD” OR “European Sustainability Reporting Standards”). The search was temporally restricted to publication years 2021 through 2026 to capture the immediate antecedents and early responses to the CSRD legislative timeline. The search was further limited to English-language journal articles and peer-reviewed reviews.

2.2 Screening process and eligibility criteria

The screening process unfolded in two discrete phases in accordance with PRISMA guidelines. The initial phase involved a review of titles and abstracts to assess the prima facie relevance of each identified record. To qualify for full-text review, a study was required to meet the following inclusion criteria. First, the study’s primary unit of analysis had to be small and medium enterprises, encompassing both listed and non-listed entities as well as micro-enterprises where explicitly specified. Second, the study’s topical focus had to center on the practices, determinants, barriers, or consequences of ESG or sustainability reporting and disclosure, rather than addressing purely operational sustainability initiatives devoid of a reporting or communication nexus. Third, the study was required to employ a clearly articulated empirical methodology, whether qualitative, quantitative, or mixed-methods in design. Studies were excluded if they focused exclusively on large-cap firms, addressed green product innovation or environmental management systems without analyzing reporting behaviors, or consisted solely of non-empirical commentary, editorial content, or practitioner-oriented trade publications lacking peer review.

The second phase of screening entailed a detailed full-text assessment of the articles that passed the initial abstract review. This phase involved a careful reading of each manuscript to confirm that it substantively addressed the research questions guiding this review and provided extractable data pertaining to motivations, challenges, or performance outcomes associated with SME ESG reporting. The application of these criteria resulted in a final synthesis sample that extended beyond the initial core corpus of 20 studies to incorporate a total of 28 high-relevance peer-reviewed articles that collectively form the evidentiary basis for the thematic analysis presented herein.

2.3 PRISMA flow diagram

The flow diagram as illustrated in Figure 1, documents the sequential reduction from initial identification to final inclusion, adhering to the PRISMA 2020 statement for transparent reporting of systematic reviews (Page et al., 2021). The final sample of 28 studies provided the data for the thematic analysis.

Figure 1. PRISMA 2020 flow diagram.

2.4 Data synthesis and analytical framework

The data extracted from the 28 included studies were synthesized using the Theory-Context-Characteristics-Methodology framework, an analytical heuristic that has gained considerable traction in the social sciences for its capacity to impose conceptual order on heterogeneous bodies of literature (Paul & Rosado-Serrano, 2019). This framework facilitates a structured comparison across studies by isolating the theoretical lenses employed by researchers, the geographical and sectoral contexts of their investigations, the specific characteristics of the SME phenomenon under examination, and the methodological approaches deployed. The application of the TCCM framework was complemented by a narrative thematic synthesis designed to identify convergent findings, persistent tensions, and emergent patterns across the sample. Given the predominance of qualitative case studies and exploratory survey designs within the SME ESG literature, coupled with significant heterogeneity in the operationalization of both dependent and independent variables, a quantitative meta-analysis was deemed methodologically inappropriate. The narrative synthesis therefore prioritizes the identification and explication of recurring themes, conceptual contradictions, and policy-relevant insights that emerge from a holistic reading of the assembled evidence base.

3.1 Study selection

The study selection process unfolded across a series of discrete and documented stages, the results of which are summarized narratively in this section and depicted graphically in the PRISMA flow diagram presented in the methodology section of this manuscript (see Figure 1). The initial identification phase, which combined a targeted retrieval of a curated primary corpus with a supplementary systematic search of the Scopus and Web of Science Core Collection databases, yielded a total of 87 potentially relevant records. The systematic database search contributed 67 records, while the expert-curated primary corpus provided an additional 20 foundational texts that were not fully captured or were in press at the time of the database interrogation. Following the removal of 12 duplicate records that appeared in both the database search results and the primary corpus, a total of 75 unique records advanced to the initial screening phase.

The screening of titles and abstracts against the predefined eligibility criteria resulted in the exclusion of 43 records. The majority of these exclusions were attributable to two primary factors. First, a substantial portion of the retrieved literature addressed sustainability practices or corporate social responsibility initiatives within SMEs but did not contain any substantive analysis of formal reporting or disclosure behaviors; these studies focused on operational changes, green product innovation, or environmental management systems without a communication or transparency nexus. Second, a number of studies that ostensibly addressed ESG reporting were excluded because their sample populations consisted exclusively or predominantly of large, publicly traded corporations, with no disaggregated analysis or specific focus on the small and medium enterprise segment. This screening phase confirmed the relative nascency of the specific research domain concerning ESG reporting in SMEs as distinct from the broader and more mature literature on large-cap sustainability disclosure.

The 32 records that successfully passed the title and abstract screening were retrieved for a detailed full-text eligibility assessment. During this more granular evaluation, an additional 4 articles were excluded. The reasons for exclusion at this stage were more specific and pertained to methodological rigor and topical relevance. Two articles were excluded because they were found, upon full inspection, to be non-empirical commentaries or practitioner-oriented editorials lacking the peer-reviewed evidence base required for inclusion in this systematic synthesis. One article was excluded because its analysis of SME reporting was limited to a single, illustrative paragraph within a broader discussion of national regulatory frameworks, providing insufficient extractable data for thematic synthesis. The final excluded article was a duplicate publication of findings already represented in a more comprehensive journal article included in the final sample. Consequently, a final corpus of 28 peer-reviewed studies met all inclusion criteria and was carried forward for data extraction, quality appraisal, and narrative thematic synthesis as summarized in Table 1.

3.2 Study characteristics

The 28 studies included in the final qualitative synthesis exhibit a distinct profile of geographical concentration, methodological orientation, and theoretical grounding that reflects the current state and emerging priorities of the SME ESG reporting research domain. A detailed summary of the key characteristics of the included studies is provided in Table 1, which serves as a comprehensive evidence map of the literature underpinning this review.

The geographical distribution of the included studies reveals a pronounced and unsurprising concentration within the European Union. Of the 28 studies, 22 (representing 78.6% of the sample) focus exclusively or predominantly on European SME populations. Within this European cluster, Italy emerges as the most intensively studied national context, accounting for nine studies (32.1% of the total sample). This Italian concentration can be attributed to the unique structure of the Euronext Growth Milan market, a dedicated segment for listed SMEs that provides a readily accessible and transparent pool of publicly available sustainability reports for content analysis and econometric investigation. Germany and Poland are represented by two studies each, while individual studies address SME populations in Finland, Spain, Greece, Cyprus, and broader pan-European samples. Beyond the European context, the sample includes two studies situated in the Middle East (Saudi Arabia), two studies from Southeast Asia (Malaysia), and two studies that adopt a multi-regional or global perspective. This geographical skew toward Europe is both a strength and a limitation of the current evidence base. It is a strength insofar as it provides deep, contextualized insight into the world’s most advanced regulatory laboratory for SME sustainability reporting. It is a limitation insofar as the findings may not be directly transferable to institutional environments characterized by weaker regulatory pressure, different capital market structures, or distinct cultural attitudes toward transparency and corporate responsibility.

The methodological composition of the included studies reflects the exploratory and descriptive orientation that has characterized much of the early-stage research in this emerging domain. Qualitative research designs, including semi-structured interviews, single and multiple case studies, and qualitative content analysis of published reports, constitute the most frequently employed methodological approach, accounting for 12 of the 28 studies (42.9%). These qualitative investigations have been instrumental in uncovering the nuanced motivations, perceptions, and strategic behaviors of SME managers, providing rich, context-dependent insights that would be difficult to capture through quantitative instruments alone. It is through these qualitative studies, for example, that the phenomenon of greenhushing was first identified and articulated (Galli et al., 2024).

Quantitative research designs, primarily employing regression analysis of archival data or survey-based statistical modeling, account for 9 of the included studies (32.1%). These quantitative studies have been essential for establishing the existence and direction of statistical relationships between ESG disclosure and key financial outcomes, such as the cost of capital analysis conducted by Gjergji et al. (2021) and the performance and risk assessment undertaken by Garrido-Ruso et al. (2026). A further 7 studies (25.0%) employed mixed-methods designs, combining the depth of qualitative inquiry with the breadth and generalizability of quantitative analysis. The study by Minutiello et al. (2026), for instance, combines a qualitative exploration of managerial beliefs with a quantitative partial least squares structural equation modeling analysis to identify the key determinants of SDG alignment in Italian manufacturing SMEs. The prevalence of qualitative and mixed-methods approaches, while appropriate for the current state of knowledge, underscores the need for more longitudinal and quasi-experimental quantitative research as the field matures and as the CSRD implementation provides natural experimental conditions as summarized in Table 1.

3.3 Risk of bias in included studies

The critical appraisal of risk of bias is an essential component of any rigorous systematic review, as it provides the reader with a transparent assessment of the internal validity and trustworthiness of the evidence upon which the review’s conclusions are constructed. Given the substantial methodological heterogeneity across the 28 included studies, which span qualitative, quantitative, and mixed-methods traditions, a single standardized risk of bias assessment tool was not deemed appropriate. Instead, a narrative, domain-based assessment was conducted, drawing upon established principles from the Cochrane risk of bias framework for quantitative studies and the Critical Appraisal Skills Programme criteria for qualitative research. The assessment of bias potential is summarized narratively below and organized by methodological approach.

For the subset of quantitative studies included in the review (n = 9), several potential sources of bias warrant explicit acknowledgment. The most pervasive concern relates to sample selection bias. Several of the quantitative studies, particularly those examining Italian listed SMEs on the Euronext Growth Milan market (e.g., Gjergji et al., 2021; Pizzi & Coronella, 2025; Roberto et al., 2024), rely on samples that are inherently restricted to firms that have voluntarily chosen to list on a dedicated SME exchange and to produce some form of sustainability disclosure. This sample is not representative of the broader population of SMEs, the vast majority of which are private, unlisted, and do not produce public sustainability reports. The findings derived from these samples may therefore reflect the behaviors and outcomes of a particularly progressive and transparent subset of the SME population, limiting the generalizability of the conclusions to the wider SME universe. Furthermore, the use of content analysis to construct ESG disclosure scores (e.g., Roberto et al., 2024; Modaffari et al., 2026) introduces the potential for measurement bias arising from the subjective coding of qualitative narrative disclosures into quantitative indices. While researchers typically employ multiple coders and report inter-rater reliability statistics to mitigate this concern, the inherent interpretive element in assessing the quality or comprehensiveness of a narrative disclosure cannot be entirely eliminated.

For the subset of qualitative studies (n = 12), the primary risk of bias pertains to the representativeness of the interview sample and the potential for social desirability bias in participant responses. The majority of qualitative studies included in this review rely on relatively small, purposive samples of SME managers or owners. While this approach is methodologically sound for exploratory, theory-building research, the findings from a study based on 30 interviews (Shalhoob & Hussainey, 2022) or 15 case studies (Galli et al., 2024) cannot be assumed to be statistically representative of the broader SME population. The insights generated are analytically generalizable to theoretical propositions but not statistically generalizable to a population. Additionally, when interviewing managers about topics such as sustainability, ethics, and environmental responsibility, there is an inherent risk of social desirability bias, wherein participants may overstate their commitment to ESG principles or underreport the challenges they face in order to present themselves and their firms in a more favorable light. The identification of the greenhushing phenomenon (Galli et al., 2024) is particularly noteworthy in this regard, as it documents a behavior strategic silence that runs counter to social desirability expectations, thereby lending credibility to the depth and candor of the qualitative accounts provided in that specific study.

For the mixed-methods studies (n = 7), the risk of bias considerations encompasses both sets of concerns articulated above. However, the triangulation of findings across qualitative and quantitative data sources inherent in the mixed-methods design serves as a partial mitigation against the biases associated with any single methodological approach. A study that finds convergent evidence from both interviews and survey data, for instance, provides a more robust and credible basis for inference than a study relying on either source alone.

Across the entire body of literature, a common and significant source of potential bias is publication bias. The studies included in this review are drawn from peer-reviewed academic journals and high-quality working papers. It is well-established in the social sciences that studies reporting statistically significant or novel and counterintuitive findings are more likely to navigate the peer-review process successfully and achieve publication than studies reporting null or non-significant results. The finding by Gjergji et al. (2021) of a cost of capital penalty for environmental disclosure, for example, possesses the kind of counterintuitive and surprising quality that facilitates publication. It is possible that other researchers have examined similar relationships and found null or inconclusive results but have been unable to publish those findings. This potential for publication bias means that the evidence base synthesized in this review may overrepresent the existence and magnitude of the challenges and paradoxes associated with SME ESG reporting, while underrepresenting instances where the process unfolds smoothly and without significant negative financial consequence. Despite these acknowledged limitations and potential sources of bias, the consistency of findings across multiple studies, multiple national contexts, and multiple methodological approaches provides a reasonable degree of confidence in the robustness and trustworthiness of the core themes identified in this systematic review.

3.4 Synthesis of findings

The narrative thematic synthesis of the 28 included studies yielded a consolidated set of findings organized around the three guiding research questions. These findings, which have been elaborated in extensive detail in Section 3 of the main manuscript, are summarized concisely here for ease of reference.

With respect to RQ1: Motivations and Drivers, the synthesis finds that SME ESG reporting is predominantly driven by extrinsic institutional pressures rather than intrinsic ethical conviction. Coercive isomorphism, manifest in the direct regulatory mandate of the CSRD for listed SMEs and the indirect supply chain pressures exerted on non-listed suppliers, constitutes the most powerful and rapidly intensifying driver of disclosure activity. Mimetic isomorphism, characterized by the emulation of large-firm reporting practices, serves as a secondary but significant driver, particularly among SMEs operating in environments of high regulatory uncertainty. Internal factors, including ethical leadership and strong corporate beliefs, play a discernible but secondary role, moderating the response to external pressures rather than initiating the reporting journey independently.

With respect to RQ2: Challenges and Barriers, the synthesis identifies a consistent set of structural and behavioral impediments that differentiate SME reporting from large-cap practice. The acute scarcity of dedicated financial and human resources, a widespread lack of specialized technical expertise, and a consequent heavy reliance on external consultants constitute the foundational structural barriers. These constraints give rise to a pronounced “size effect” in disclosure quality, wherein larger SMEs and those with greater reporting experience produce significantly higher quality disclosures. A particularly significant behavioral finding is the documentation of greenhushing, the deliberate strategic decision to not communicate about substantive sustainability achievements due to fears of increased scrutiny, administrative burden, and a perceived lack of tangible benefit.

With respect to RQ3: Performance Links, the synthesis reveals a complex and nuanced relationship between ESG disclosure and financial outcomes that deviates from the positive associations documented in large-firm research. The most striking finding is the identification of an SME-specific cost of capital penalty associated with environmental disclosure for non-family firms. This finding, termed the Gjergji Paradox, suggests that capital markets may interpret SME environmental transparency as a signal of potential cost burden and operational distraction rather than effective risk mitigation. This penalty is moderated by family ownership, which appears to neutralize or reverse the negative association. Conversely, social performance, particularly investments in employee well-being and labor relations, demonstrates a positive association with financial resilience, providing a buffer against the impact of exogenous economic shocks.

3.5 The drivers of SME ESG disclosure: Coercion, mimicry, and the CSRD cascade

The first thematic pillar addresses the fundamental question of motivation: why do SMEs, in the absence of historical mandates, choose to allocate their scarce resources to the production of sustainability reports. The literature resoundingly indicates that SME engagement with ESG disclosure is an overwhelmingly extrinsically motivated phenomenon, driven less by internal ethical conviction and more by a complex interplay of coercive and mimetic institutional pressures. The theoretical lens of Institutional Theory, particularly the typology of isomorphic pressures developed by DiMaggio and Powell (1983), provides a powerful explanatory framework for understanding the observed patterns of SME behavior across diverse geographical and regulatory contexts. The dominant drivers identified in the literature are coercive isomorphism, rooted in the exercise of regulatory power and supply chain leverage, and mimetic isomorphism, characterized by the emulation of perceived industry leaders in the face of uncertainty.

The most potent and rapidly intensifying driver of SME ESG disclosure is the specter of regulatory coercion embodied by the European Union’s Corporate Sustainability Reporting Directive. As detailed by Barro et al. (2025) and Faqih and Kramer (2024), the CSRD establishes a clear and non-negotiable compliance pathway for all listed SMEs operating within EU member states, with the first wave of mandatory reporting scheduled to commence for the 2026 financial year. This legislative mandate eliminates the voluntary nature of previous non-financial reporting regimes and replaces it with a legal obligation backed by potential penalties and assurance requirements. The pressure exerted by the CSRD, however, extends far beyond the population of listed SMEs that fall directly within its legal scope. Westman’s (2025) qualitative investigation of non-listed Finnish SMEs provides compelling evidence of what can be termed the CSRD cascade effect. This phenomenon describes the process by which the reporting obligations imposed on large corporations create downstream pressure on their private SME suppliers. As large firms are required to collect and disclose granular data on their Scope 3 emissions and broader supply chain sustainability performance, they, in turn, demand corresponding ESG data from their smaller trading partners. This transforms what is nominally a voluntary activity for private SMEs into a de facto condition of continued commercial engagement, effectively coercing disclosure through the exercise of supply chain power rather than direct legal statute.

In addition to coercive pressures, the literature provides strong evidence of mimetic isomorphism shaping the reporting behaviors of SMEs navigating the uncertain terrain of sustainability disclosure. In the absence of established, sector-specific benchmarks for what constitutes appropriate or sufficient SME reporting, smaller firms engage in a process of modeling their own practices on those of organizations they perceive as more legitimate or successful. Pizzi and Coronella (2025), in their analysis of Italian listed SMEs, present a nuanced and important refinement of the mimetic isomorphism concept. Their findings indicate that SMEs do not simply mimic the reporting behaviors of their direct SME peers or competitors. Instead, they tend to emulate the sustainability reporting practices of all listed companies, effectively looking up the value chain and adopting the more complex and resource-intensive disclosure formats characteristic of large-cap multinationals. This finding has significant practical implications, as it suggests that SMEs may be inadvertently adopting reporting frameworks, such as the full Global Reporting Initiative Standards or the complete European Sustainability Reporting Standards, that are technically and financially mismatched to their organizational scale and internal capabilities. Steidle et al. (2025) corroborate this pattern in the German context, observing that SMEs frequently gravitate toward the GRI framework in pursuit of external legitimacy and perceived credibility, even when the application of that framework imposes a disproportionate administrative burden relative to the informational needs of their primary stakeholders.

While external institutional pressures dominate the motivational landscape, the literature does acknowledge a role for internal, value-driven factors, particularly within specific ownership and cultural contexts. Ong et al. (2025), in their examination of Malaysian micro, small, and medium enterprises, identify ethical leadership as a significant predictor of ESG adoption. Their qualitative analysis, drawing on interviews and documentary evidence, suggests that the personal moral convictions of owner-managers and the prevailing normative beliefs embedded within the corporate culture can, in certain instances, act as a catalyst for sustainability engagement that operates independently of immediate regulatory or market pressures. Similarly, Minutiello et al. (2026), employing partial least squares structural equation modeling on a sample of Italian manufacturing SMEs, found that a construct they term “corporate beliefs” was a more influential determinant of alignment with the Sustainable Development Goals than either the personal demographic background of the firm’s leadership or objective firmographic characteristics such as size or profitability. These findings underscore that the motivational calculus is not monolithic; rather, it represents a dynamic interplay between powerful external forces and the internal values and governance structures of individual firms as summarized in Table 2.

3.6 The structural and behavioral challenges: Resource scarcity and the phenomenon of greenhushing

The second thematic pillar shifts the analytical focus from the external forces that propel SMEs toward reporting to the internal barriers and strategic responses that shape their actual engagement with the disclosure process. The synthesis of the literature reveals a consistent and geographically pervasive set of challenges that differentiate the SME reporting experience from that of large, well-resourced corporations. While large firms contend with issues of data assurance and stakeholder skepticism regarding greenwashing, the SME literature identifies a distinct and, in many respects, more fundamental set of obstacles. These challenges cluster around two interconnected phenomena: the acute scarcity of financial and human resources dedicated to non-core functions, and the emergence of a counterintuitive strategic response termed greenhushing.

The resource constraint is the most frequently cited and empirically documented barrier to effective SME sustainability reporting across the entire body of literature reviewed. Shalhoob and Hussainey (2022), in their qualitative interview-based study of SMEs in Saudi Arabia, found that a fundamental lack of awareness regarding the very concept of ESG practices and the potential importance of their disclosure for long-term sustainability performance constitutes the primary starting point for many smaller firms. This awareness gap is compounded by a severe deficit in the specialized technical expertise required to identify material sustainability topics, collect and validate relevant data, and structure that information into a coherent and compliant report. Cavaliere et al. (2026), in their investigation of Italian SMEs navigating the complexities of the new European Sustainability Reporting Standards, provide a detailed account of the structural limitations that characterize the sector. Their findings highlight insufficient internal human resources, a widespread lack of in-house accounting and sustainability expertise, and a consequent heavy and often costly reliance on external consultants to perform functions that larger firms have internalized within dedicated departments. This dependency on external advisory services not only imposes a direct financial burden on the SME but also inhibits the process of organizational learning and the internalization of integrated thinking, as documented by Rossi and Luque-Vílchez (2021). The reliance on external consultants to construct the report means that the underlying knowledge and data management systems often remain outside the firm, limiting the long-term strategic value of the reporting exercise.

The size effect in disclosure quality is a direct and observable consequence of this resource disparity. Steidle et al. (2025), in their detailed content analysis of sustainability reports produced by German SMEs, provide robust evidence that both absolute company size and accumulated reporting experience are strong, positive predictors of disclosure quality. Their findings indicate that larger SMEs, which presumably possess greater internal resource slack, and those firms that have engaged in the reporting process over multiple annual cycles produce sustainability disclosures of significantly greater depth, specificity, and transparency. This improvement in quality is particularly pronounced when firms are able to incorporate quantitative performance indicators into their reports, a capability that requires more sophisticated data collection and management systems than the production of purely narrative, qualitative disclosures. This evidence underscores the existence of a maturity curve in SME reporting that is steep and resource-intensive, a curve that very small micro-enterprises and first-time reporters may find prohibitively difficult to ascend without targeted external support.

Perhaps the most intriguing and theoretically significant finding to emerge from the synthesis of this literature pertains not to the quality of the reports that are produced, but to the strategic decision of many SMEs to not report at all, even when they possess a substantive and potentially compelling sustainability story to tell. The research by Galli et al. (2024), conducted within the specific context of the Italian meat and cured meat industry, introduces and empirically documents the practice of greenhushing. The authors define greenhushing as the deliberate and strategic absence of, or significant limitation on, external communication regarding effectively implemented and genuinely impactful sustainability practices. This behavior stands in stark contrast to the well-publicized phenomenon of greenwashing, wherein firms engage in extensive promotional communication about sustainability initiatives that are, in reality, superficial or nonexistent. The SMEs in Galli et al.’s (2024) study were found to be actively engaged in substantive sustainability actions, but they made a conscious choice to remain silent about these achievements. The motivations driving this strategic silence are multifaceted and deeply pragmatic. They include a fear of triggering heightened scrutiny from regulators, customers, or local communities; a concern that increased visibility would invite additional administrative burdens and requests for information that the firm lacks the capacity to fulfill; and a perception, grounded in the lived experience of operating in a competitive and low-margin industry, that transparency yields no tangible competitive advantage sufficient to offset its associated costs and risks. The greenhushing phenomenon presents a profound challenge to policymakers and advocates of greater SME transparency, as it suggests that the current reporting ecosystem, with its emphasis on complex and costly standardized frameworks, may be actively disincentivizing the very behaviors and communication practices it seeks to encourage. The Figure 2 illustrates the hypothesized decision pathway leading to greenhushing behavior in SMEs, synthesized from the empirical findings of Galli et al. (2024) and the analysis of structural constraints presented by Cavaliere et al. (2026).

Figure 2. Conceptual model of the SME Greenhushing decision pathway.

3.7 The performance paradox: ESG disclosure and the cost of capital in SMEs

The third and final thematic pillar addresses the question of greatest practical significance to SME owner-managers, investors, and lenders: what is the relationship between ESG disclosure and the traditional metrics of financial performance and capital access? The synthesis of the evidence reveals a relationship that is considerably more complex, contingent, and, in certain critical respects, counterintuitive than the positive association documented in the large-cap corporate finance literature. The prevailing narrative in large-firm research posits that superior ESG disclosure reduces information asymmetry, signals effective risk management, and thereby lowers a firm’s cost of capital. The evidence specific to the SME sector challenges this narrative, revealing what can be termed the Gjergji Paradox.

The most striking and influential finding in this domain comes from the quantitative analysis conducted by Gjergji et al. (2021) on a sample of Italian listed SMEs. Their study examined the differential impact of the three individual ESG pillars on the firm’s cost of capital, while also investigating the moderating role of family business status. The results of their analysis are both nuanced and revealing. The study found that environmental disclosure, contrary to the established large-firm evidence and standard theoretical expectations, was associated with a statistically significant increase in the cost of capital for the average SME in their sample. The authors theorize that this counterintuitive finding stems from the unique position of smaller firms in capital markets. For an SME operating with constrained resources and a limited track record of non-core business activities, extensive environmental disclosure may be interpreted by investors and lenders not as a signal of sophisticated risk mitigation but rather as a signal of potential operational disruption, impending regulatory compliance costs, or a diversion of scarce managerial attention away from core profit-generating activities. In this interpretation, environmental transparency is priced as a risk factor rather than a value-enhancing characteristic.

Crucially, the Gjergji et al. (2021) study identifies a significant moderating variable that serves to delineate the boundary conditions of this observed penalty. The negative association between environmental disclosure and the cost of capital was found to be neutralized, and in some specifications even reversed, for family-owned SMEs. The authors argue that the unique governance characteristics of family firms, including their typically longer-term investment horizons, their heightened concern for the preservation of socioemotional wealth and family reputation, and their often closer and more stable relationships with local stakeholders, alter the interpretive lens through which capital providers view their environmental communications. For a family SME, a commitment to environmental responsibility may be perceived as a credible and durable signal of long-term stewardship, aligning the interests of the firm with the risk perceptions of its capital providers. In contrast, for a non-family SME with a more dispersed ownership structure and a shorter-term financial orientation, the same environmental disclosure may be met with greater skepticism and priced accordingly.

Further nuance is added to the understanding of the SME ESG-financial performance nexus by the work of Garrido-Ruso et al. (2026). Their analysis, which examines the relationship between ESG performance scores and firm performance and risk metrics across a broader European SME sample, suggests that the impact of ESG is not uniform across its constituent pillars. Their findings indicate that while the overall relationship may be positive but weak, the social pillar, encompassing practices related to labor relations, employee well-being, and community engagement, demonstrates a particularly robust positive association with financial resilience. The study finds that SMEs with stronger social performance metrics were better positioned to weather the economic disruption caused by exogenous shocks such as the COVID-19 pandemic. This finding aligns with a broader stakeholder-oriented perspective, suggesting that investments in human capital and social license to operate provide a tangible buffer against operational and financial volatility, a buffer that is especially valuable for smaller firms with less diversified asset bases and shallower financial reserves. The literature therefore points toward a bifurcated performance landscape in which environmental transparency may be penalized in the short to medium term, particularly for non-family firms, while social investments yield more immediate and observable benefits in terms of organizational resilience and stakeholder loyalty as summarized in Table 3.