A recent study by Galery and Fangling from Yangzhou University, China, published in March 2026 in the International Journal of Business and Applied Economics, reveals that the combination of digital transformation and green innovation significantly improves the sustainable performance of small and medium-sized enterprises (SMEs). The research highlights Environmental, Social, and Governance (ESG) management as the critical bridge driving high-quality business growth.
Amid global pressures such as climate change, rapid digitalization, and shifting post-pandemic consumer behavior, SMEs face mounting challenges to remain competitive. Consumers today are not only price-sensitive but increasingly value sustainability, social responsibility, and corporate transparency. This shift forces businesses to adopt more integrated and sustainable strategies.
The study focuses on SMEs in China’s Yangtze River Delta, a major industrial hub under strict carbon emission regulations. Data was collected through surveys of SME executives combined with historical company data, enabling a comprehensive analysis of the relationships between digital transformation, green innovation, ESG management, and business performance.
The findings highlight several key insights:
- Digital transformation significantly improves ESG management quality (β=0.254).
- Green innovation has a stronger impact on ESG (β=0.338).
- ESG significantly enhances high-quality business performance (β=0.474).
- Digital transformation delivers the strongest direct effect on performance (β=0.487).
- Green innovation also contributes significantly to performance (β=0.369).
- ESG acts as a crucial mediator linking innovation and transformation to business outcomes.
The study further reveals that green innovation relies heavily on ESG mechanisms to translate into economic value. Without strong ESG management and reporting, environmentally friendly investments tend to generate delayed financial returns. In contrast, digital transformation can directly improve efficiency and profitability without relying heavily on ESG processes.
Galery from Yangzhou University explains that “ESG is no longer just a reporting tool but a core system that converts digital and green investments into tangible economic value.” Fangling adds that companies capable of integrating digital technologies with sustainability strategies are better positioned to attract modern consumers and investors.
The implications of this research are significant. For business leaders, it underscores the importance of aligning technological investments with sustainability strategies. For policymakers, it highlights the need for integrated incentives that support both digitalization and green innovation, such as green technology subsidies and ESG-based financing schemes.
Practically, SMEs are encouraged to:
- Integrate digital technologies with sustainability strategies from the outset.
- Use ESG frameworks as tools to monitor market trends and consumer preferences.
- Foster internal collaboration to accelerate green innovation.
Author Profile
- Galery - Yangzhou University
Source
Galery & Fangling. (2026). The Synergy of Digital Transformation and Green Innovation on SME Sustainability Performance: The Mediating Role of ESG Management in High-Quality Development. International Journal of Business and Applied Economics, Vol. 5 No. 2, pp. 713–724.
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