Small Bus Econ (2025) 64:1535–1564

[Link]

RESEARCH ARTICLE

Is sustainable entrepreneurship profitable? ESG disclosure

and the financial performance of SMEs
Paul P. Momtaz · Isabel M. Parra

Accepted: 30 October 2024 / Published online: 7 December 2024

© The Author(s) 2024

Abstract Sustainability practices have a positive nous ESG certification increased, while endogenous
effect on the financial performance of SMEs. We ESG signals without external certification became inef-
extract ESG-related information for a sample of Span- fective or detrimental. Finally, in line with CSR-as-
ish SMEs over the period 2012–2022 using tools pro- insurance theory, we show that SMEs with higher per-
vided by the Internet Archive to estimate a staggered formance variability benefit more from sustainability
difference-in-differences model of how the release of orientation.
new ESG-related information impacts the financial per-
formance of SMEs. ESG-related information can be Plain English Summary Sustainability practices
delivered as an endogenous signal or as an exogenous enhance the financial performance of small- and medium-
certification. We show that both types of ESG-related sized enterprises (SMEs) in Spain. We gathered data
information have a positive effect on SMEs’ financial from 2012 to 2022 using Internet Archive tools to inves-
performance and that both are informational substi- tigate the impact of new environmental, social, and gov-
tutes. We also show that institutional change in the form ernance (ESG) information on SMEs’ financial perfor-
of the 2015 Paris Agreement on Climate Change mod- mance. ESG information can come from internal com-
erated the sustainability–performance relation. Specif- pany sources (e.g., websites) or external certifications.
ically, post-Paris, the value-creating impact of exoge- Our findings show that both types improve financial
results but act as substitutes, providing similar infor-
P. P. Momtaz (B) mation. The 2015 Paris Agreement on climate change
Technical University of Munich, TUM School of Management, reshaped the relationship between ESG information
Arcisstr. 21, 80333 Munich, Germany and financial performance. After the agreement, exter-
e-mail: momtaz@[Link] nal ESG certifications became more valuable, while
P. P. Momtaz internal ESG signals without external validation lost
Syracuse University, Syracuse, NY 13244, USA their positive impact. SMEs with more varying finan-
CESifo, Center for Economic Studies, Munich, Germany cial performance gained greater benefits from adopting
University College London, Computer Science, Center for sustainable practices, supporting the idea that sustain-
Blockchain Technologies, London, UK ability can serve as insurance during economic uncer-
tainty. Thus, the main implication of this study is that
I. M. Parra
Financiación e Investigación Comercial, Universidad Autónoma SMEs should reinforce their ESG orientation, as they
de Madrid (UAM), Madrid, Spain could achieve financial benefits.

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1536 PP. Momtaz, IM. Parra

Keywords Sustainability · Environment, Social, tion” dynamics. It remains unclear, however, whether
and Governance (ESG) policy · Corporate social such a business case exists for SMEs for at least
responsibility (CSR) · Firm performance · SMEs · two reasons (Ernst et al., 2022; Mansouri & Momtaz,
Sustainable entrepreneurship 2022): (i) ESG goals impose binding restrictions upon
entrepreneurs that limit the scope of viable routes to
JEL Classification G24 · G34 · Q53 · Q56 (economic) success, and (ii) entrepreneurs largely fail
to internalize ESG rents because they come as posi-
tive externalities. Put differently, unlike larger corpo-
1 Introduction rates, SMEs do benefit neither from economies of scale
A rapidly growing literature examines the significance nor from economies of scope to reduce per-unit over-
of sustainability for small- and medium-sized enter- head costs related to ESG. Uncertainty about the eco-
prises (SMEs) (for excellent recent reviews, see John- nomic appeal of sustainable entrepreneurship is ubiq-
son and Schaltegger, 2020; Anand et al., 2021).1,2 uitous in the literature (see Friede et al., 2015, for a
Sustainable SMEs are characterized by profit-seeking review of the empirical evidence). For example, Hall
behavior that embraces the broader (non-financial) et al. (2010) refer to sustainable entrepreneurship as a
environmental, social, and governance (ESG) goals of “controversial” field with “major gaps in our knowl-
our time.3 A common theme in the literature is the edge of whether and how this process will actually
invocation of Schumpeter’s (1942) notion of “creative unfold,” partly because opportunities for sustainable
destruction” to explain how sustainable SMEs may entrepreneurship “lie beyond the pull of existing mar-
effect sustainable change in the economy (e.g., Cohen kets” (p. 439). Similarly, it is worthy to note that sus-
and Winn, 2007; Shepherd and Patzelt, 2017; Hall and tainable entrepreneurship may be shaped by external
Vredenburg, 2003; Hart and Milstein, 1999; Hart and pressures, but it is also clearly related to internal prac-
Christensen, 2002; Senge et al., 2001; and, for a general tices, values, and beliefs, which distinguishes sustain-
discussion of Schumpeterian logic applied to sustain- able entrepreneurship from corporate social responsi-
able entrepreneurship, York and Venkataraman, 2010; bility (CSR).
Hockerts and Wüstenhagen, 2010). It is a tenet of the lit- The present study addresses this important gap, ask-
erature that a market’s failure to solve ESG challenges ing the following research question: How does sustain-
creates entrepreneurial opportunities. ability orientation, as proxied by SMEs’ endogenous
An important research gap concerns whether sus- ESG signals and third parties’ exogenous ESG certi-
tainability orientation is economically attractive for fication, relate to firm performance in SMEs?,4 Fol-
SMEs in the first place. Schumpeter (1934, 1942) lowing the finance literature (e.g., Officer, 2007), we
assumes that technological innovations provide SMEs draw a distinction between signals and certification by
with a business case (often associated with more cost- the origin of the information. A signal is information
efficient production than incumbents), which is the sent by the entity itself it refers to. A certification is
underlying force behind unfolding “creative destruc- information sent by a trusted third party.5 The research
question is particularly interesting in the SME con-
1 For earlier reviews, see Bischoff and Volkmann (2018), Dean text because SMEs are more resource-constrained than
and McMullen (2007), Gast et al. (2017), Kraus et al. (2018), larger corporations (Barney, 1991; Wernerfelt, 1984),
Muñoz and Cohen (2018), Sarango-Lalangui et al. (2018), Schae- which implies that sustainability orientation comes
fer et al. (2015), Shepherd and Patzelt (2011), Terán-Yépez et al.
(2020). 4 We are not the first to examine the relation between sustainabil-
2 The theoretical perspective in this introduction is partly ity orientation and funding success (see also, e.g., Vismara 2019;
adapted from Mansouri and Momtaz (2022). Hörisch, 2015; Guzmán et al., 2020); however, to the best of our
3 Sustainable entrepreneurship’s profit orientation is the key fac- knowledge, we are among the first to study the relation between
tor distinguishing it from social and environmental entrepreneur- ESG-related information disclosure and firm performance in a
ship, which focuses on socioecological returns as its primary longitudinal sample of SMEs.
goal, as discussed by, e.g., Kraus et al. (2018), and for helpful 5 A shortcoming of our chosen taxonomy is that the certifica-

overarching debate, see also Muñoz and Dimov (2015), O’Neil tions are endogenously initiated, as the SME needs to request
and Ucbasaran (2016), York and Venkataraman (2010). Man- the certification from the certifying body; however, the certifica-
souri and Momtaz (2022) also offer an integrative definition of tion’s information content per se is exogenous, which is what is
sustainable entrepreneurship, grounded in current debate. of relevance for our study.

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Is sustainable entrepreneurship profitable? ESG disclosure and the financial performance of SMEs 1537

with a more substantial trade-off and hence has plausi- formance Hypothesis (SSOH) posits that sustainability
bly a more salient impact on firm performance. Also, orientation leads to superior firm performance in SMEs.
private firms, unlike their public counterparts, are to Moreover, as further discussed in Section 2.1, below,
some extent isolated from capital market pressures that the SSOH can be connected to existing evidence that
might nudge SMEs into opportunistic behaviors (Stein, sustainable entrepreneurship is associated with, inter
1989), and thus their example may help uncover a more alia: (i) lower risk (Knight, 1997; Kraus et al., 2018),
fundamental sustainability–firm performance relation (ii) trust-creating altruism (Momtaz, 2020; Tilley &
that could contribute to the broader sustainability litera- Young, 2009), (iii) first-mover advantages (Hockerts
ture. This question is fundamental for scholars and pol- & Wüstenhagen, 2010; Lieberman & Montgomery,
icymakers alike because a potential lack of economic 1988), (iv) product differentiation (Albuquerque et al.,
incentives would suggest that SMEs need government 2019), and (v) personal characteristics that are corre-
subsidies to act as ESG “change agents” (Anand et al., lated with signals of entrepreneurial quality, such as
2021, p. 2) and that entrepreneurship scholars poten- human, social, and intellectual capital (Ahlers et al.,
tially need to adopt a different lens from that of Schum- 2015; Colombo, 2021; Egri & Herman, 2000; Fisch,
peter (1942). 2019; Spence et al., 2011; Vega & Kidwell, 2007). Sus-
In theory, the prospect of non-economic utility is tainable entrepreneurship should hence predict outper-
the key feature distinguishing sustainable SMEs from formance in SMEs.6
sustainability-agnostic SMEs (Vismara, 2019). As long In Sections 2.2 to 2.4, we derive further hypothe-
as stakeholders’ preferences include sustainability, sus- ses related to an informational substitution effect of
tainable SMEs are positioned to outperform. Dele- endogenous ESG signals and exogenous ESG certifi-
gated philanthropy theory posits that various stake- cation for SME performance, the role of institutional
holders (e.g., shareholders, employees, customers, sup- change and pressure for sustainable behavior (in par-
pliers, local communities) have heterogeneous pref- ticular, with respect to the 2015 Paris Agreement on
erences with regard to ESG goals that markets and Climate Change) and its impact on the relation pre-
governments fail to achieve; hence, stakeholders may dicted by the SSOH, and how sustainability orientation
delegate such ESG activities to companies that have may insure SMEs against failure.
transaction-cost and economies-of-scale advantages The identification of any effect of ESG-related
compared to the individual stakeholder (Bénabou & information disclosure on firm performance is empir-
Tirole, 2010). In the hypothetical scenario that sustain- ically challenging for two reasons. First, there is a
able and sustainability-agnostic SMEs share the same reverse causality concern ubiquitous in the sustain-
business case, sustainable SMEs should thus outper- ability literature (e.g., Koh et al., 2014; Kim et al.,
form, with the differential being attributable to stake- 2021) that any estimation of a “doing well by doing
holders’ ESG-related utility. Sustainable SMEs’ out- good” effect might be endogenous to firms doing good
performance is even in line with Friedman’s (1970) only when they are doing well (or when the econ-
famous claim that “the social responsibility of busi- omy is in good state) because maintaining a com-
ness is to make profits.” As long as SMEs have a mitment to doing good requires sufficient financial
competitive advantage in achieving economic and ESG slack. Second, there is a concern of measurement
goals simultaneously, investors with ESG preferences error given that ESG-related information disclosure
should entrust ESG goals to SMEs with specialized may represent misreported information or bias signals
skills (Hart & Zingales, 2017), which will, in turn, due to greenwashing (Delmas & Burbano, 2011; Lyon
achieve superior performance through various mech- & Maxwell, 2011). To overcome both concerns, we
anisms, such as higher willingness-to-pay for products estimate the relation between sustainability orienta-
and services on the part of their customers or higher tion and firm performance in SMEs with a staggered
effort provision on the part of their employees. For
example, it might be more efficient for investors to 6 Other studies that focus on sustainable entrepreneurship out-
delegate their ESG goals to three specialized SMEs— comes, albeit with a different focus, include (Dickel, 2017; Djup-
dal & Westhead, 2015; Gregori et al., 2019; Hoogendoorn et al.,
one that targets E-goals, another for S-goals, and a
2019; Jahanshahi & Brem, 2017; Kraus et al., 2017; Lans et al.,
third for G-goals—than to tackle all ESG goals them- 2014; Muñoz et al., 2018; Mupfasoni et al., 2018; Testa et al.,
selves. Consequently, our Sustainable SME Outper- 2019; Volkmann et al., 2021).

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difference-in-differences analysis of endogenous ESG that sustainability research in small- and medium-size
signals and exogenous ESG certification. The stag- companies should not go unnoticed.
gered difference-in-differences model exploits the lon- Our results confirm that sustainability orientation
gitudinal structure of our sample and the fact that SMEs has a significant and positive impact on SMEs’ finan-
disclose ESG-related information at different points in cial performance, and this effect takes place when
time. Hence, any ESG-related information disclosure this information comes from both endogenous ESG
is exploited as a treatment to an SME’s sustainabil- signals and exogenous ESG certifications. We also
ity orientation. The consideration of endogenous ESG find that SMEs use disclosing of ESG signals and
signals (i.e., communicated sustainability orientation ESG certifications as substitute methods of inform-
without backing by hard facts) and exogenous ESG ing their stakeholders about their ESG practices. Like-
certification (i.e., communicated sustainability orien- wise, analyzing the impact of the Paris Agreement
tation with backing by hard facts, such as environ- on the relationship between sustainability and perfor-
mental certifications by the International Organization mance reveals that exogenous ESG certifications are
for Standardization) ensures that we are able to dis- more valued than endogenous ESG signals, particularly
tinguish between ESG-related information disclosure web-based disclosure, reinforcing the former’s posi-
with potential measurement error (i.e., endogenous sig- tive effect on financial performance. Lastly, we test the
nals subject to greenwashing concerns) and without sustainability-as-insurance argument to reveal how the
(i.e., exogenous certification). positive effect of ESG disclosure on financial perfor-
In order to analyze the proposed hypotheses, we mance is enhanced when companies go through peri-
compiled a database of 527 non-listed medium-sized ods of increased uncertainty and thus higher volatility
companies located throughout Spain and belonging to in their net income. We find that our results support
17 different industries. The ESG information (which the SSOH. Post-hoc tests confirm that these results
was provided by firms on their websites) as well as their hold, but only for the greener industries, while for
ESG-related International Standardization Organiza- brown firms, the influence of sustainability orientation
tion (ISO) certificates were collected manually. Finan- on financial performance is not significant.
cial information was procured from Bureau van Dijk’s The remainder of the paper is organized as follows:
SABI database, and both ESG and financial informa- Section 2 reviews the theoretical framework around
tion was obtained for the period 2012 to 2022. sustainable SME performance and derives empirical
Our focus is on SMEs because they are an essential predictions. Section 3 describes our sample. Section 4
component of the European economy, particularly in describes our empirical approach and presents our
Spain, where they represent 99.8% of companies and empirical results. Section 5 provides discussion of our
employ 66% of the workforce (Government of Spain, main results, practical implications, and theoretical
2021c). Although non-financial reporting is not manda- contributions, highlighting limitations and potential
tory for unlisted SMEs, an increasing number of com- avenues for future research.
panies are disclosing information on their ESG activ-
ities. This disclosure is often necessary to access cer-
tain forms of financing, engage in international busi- 2 Theoretical background and hypotheses
ness, or meet the requirements of large companies for
establishing business relationships (Ortiz-Martínez and 2.1 Sustainability and firm performance in SMEs
Marín-Hernández, 2022). In addition, European Finan-
cial Reporting Advisory Group (EFRAG) has also We draw on two lines of theoretical reasoning to argue
developed a voluntary sustainability reporting standard why sustainability orientation might have a positive
for non-listed SMEs (VSME) (EFRAG, 2024). This impact on SME financial performance: delegated phi-
standard aims to standardize the current multiple ESG lanthropy theory and transaction cost economics.
data requests and provide SMEs with better access Delegated philanthropy theory submits that, because
to lenders, investors, and customers. Consequently, a various stakeholders (e.g., shareholders, employees,
higher level of non-financial disclosure from SMEs is customers, suppliers, local communities) have hetero-
expected in the future. For these reasons, we believe geneous preferences with regard to ESG goals that

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Is sustainable entrepreneurship profitable? ESG disclosure and the financial performance of SMEs 1539

markets and governments fail to achieve for some 1937, 1960). Transaction costs include all costs related
stakeholders, stakeholders may delegate such ESG to information and search, bargaining and closing,
activities to companies that have transaction-cost and and monitoring and enforcing contractual agreements
economies-of-scale/-scope advantages compared to the (Williamson, 2010). SME owners and managers may
individual stakeholder (Bénabou & Tirole, 2010). In have advantages regarding all such cost types due to
the case of SMEs, the delegation of ESG initiatives is their privileged access to local information, given their
well documented, e.g., by limited partners (i.e., venture direct involvement in operations and strategy and their
capital providers) and general partners (i.e., venture fostering of local social ties (Acharya et al., 2013;
capital managers) to sign addenda to limited partner- Kim et al., 2019; Santos-Jaén et al., 2021). Unlike
ship agreements (LPAs) detailing their sustainability those of larger companies, SME owners and man-
requirements for the investment process (Geczy et al., agers may accumulate local information thanks to their
2021). geographic proximity, for example, through frequent
SMEs may internalize negative externalities of non- production facility visits and operational involvement,
sustainable behavior to a greater extent because the such as representation in daily decision-making. Per-
power hierarchy is flatter in SMEs, resulting in greater sonal interactions with various stakeholders allow SME
exposure of owners and managers to workers, sup- owners and managers to collect soft information and
pliers, and customers. Thus, any detrimental impact tacit knowledge in a cost-efficient way (Kim et al.,
of non-sustainable behavior on workers, suppliers, 2019), which in turn leads to a higher willingness
and customers (and owners and managers themselves) among employees to adopt new sustainability-oriented
affects owners and managers in a less intermedi- measures if the negotiating SME owners and managers
ated manner than in larger companies, nudging them are able to communicate an operational understand-
to avoid non-sustainable behavior in the first place. ing of the affected employees’ routines and the con-
SME owners and managers are more involved in the sequences of the demanded measures (Allen, 2012;
operational day-to-day work and potential restructur- Macey & Susskind, 2003) in and out of crisis situa-
ing initiatives of production facilities than the man- tions (Magrizos et al., 2021). Similarly, sociological
agers of larger corporates, creating personal expo- studies provide evidence that stronger social ties help
sure to ESG risks and social liability in face-to- in implementing pollution abatement measures, effec-
face interactions with employees and members of tively leading to lower toxic chemical releases (Kim
local communities (Cantele & Zardini, 2020; Cross- et al., 2019). A large body of research also shows that
ley et al., 2021; Lähdesmäki et al., 2019; O’Neil & SME owners and managers, as well as their investors,
Ucbasaran, 2016). Moreover, SME owners’ and man- have superior governance skills, which facilitate the
agers’ self-image concerns may drive prosocial/pro- monitoring and enforcement of restructuring measures
environmental behaviors because improving sustain- (Acharya et al., 2013; Cohn et al., 2022). Therefore, in
ability orientation creates image value, not just locally a world where markets and governments fail to resolve
where it is immediately visible to local stakeholders, our greatest ESG challenges, SME owners and man-
but also generally by contributing to an SME’s rep- agers may have a transaction-cost advantage in doing
utation, which might lead to higher funding inflows so.
(Gillan et al., 2021; Hartzmark & Sussman, 2019;
H1a: The relation between ESG signaling and the
Hawn et al., 2018), certification value to prosocial/pro-
financial performance of SMEs is positive.
environmental stakeholders, and credibility to realize a
H1b: The relation between ESG certification and the
“greenium” (i.e., an environmental multiple expansion)
financial performance of SMEs is positive.
(Pástor et al., 2022).
Transaction cost arguments explain why SMEs may
2.2 Endogenous ESG signaling and exogenous ESG
act as key change agents in resolving the grand ESG
certification
challenges of our time. Transaction cost economics
submits that, when property rights contracts are com- ESG-related information disclosure by SMEs can be
plete and there are no transaction costs, individual based on endogenous signaling or exogenous certifi-
market participants may contract efficiently even if cation. ESG signaling refers to SMEs’ self-initiated
the aggregate market outcome is inefficient (Coase, communications about their sustainability orientation

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directly to their stakeholders through such means have established credibility, self-reported ESG signal-
as self-reported data in sustainability reports, press ing might suffice.
releases, marketing materials, and public statements
about ESG goals and achievements,7 ESG certifica- H2: ESG signaling and ESG certification are informa-
tion, in turn, is provided by an external third party, often tional substitutes.
a recognized authority or certification body specializ-
Of course, the practice of greenwashing might
ing in ESG criteria, such as the International Orga-
undermine the equal effectiveness of ESG signal-
nization for Standardization (ISO), by means of rig-
ing and ESG certification, as stakeholders may strug-
orous assessments of SMEs’ ESG practices against
gle to distinguish genuine ESG commitments from
established standards or criteria. According to signal-
marketing-driven efforts with little substantive impact
ing and certification theories, both devices, provided
(Delmas & Burbano, 2011; Lyon & Maxwell, 2011).
they are soundly implemented, are helpful in reducing
For a signal to be effective, it must be credible, which
informational asymmetry between SMEs and stake-
in turn implies that a signal must be both costly and
holders (for excellent reviews, see Vismara, 2018b;
observable (Spence, 1973). For a certification to be
Colombo et al., 2019; Vismara, 2019; Meoli and Vis-
effective, it must be provided by an external third party
mara, 2021; Vismara, 2018a; Colombo, 2021). In con-
by means of an independent assessment (Rao, 1994).
texts where the credibility of self-reported signals may
As long as informational asymmetry persists, exoge-
be met with skepticism due to an inherent conflict of
nous certifications are perceived as more credible than
interest and the potential for biased reporting, such as
endogenous signals because they reduce the potential
ESG-related information disclosure (Delmas & Bur-
for bias and manipulation. In the context of ESG, the
bano, 2011; Lyon & Maxwell, 2011), the information
increasing prevalence of greenwashing further com-
content of certification might be of higher value than
plicates the effectiveness of ESG signaling, as self-
that of signaling (Connelly et al., 2011).
reported ESG signals might be viewed with increased
In the context of SMEs, ESG signaling and ESG cer-
skepticism (Lyon & Maxwell, 2011). ESG certifica-
tification might plausibly be informational substitutes.
tion can serve as a safeguard against greenwashing by
One reason is that both ESG signaling and ESG certifi-
providing a more objective assessment of a company’s
cation are supposed to convey the same information to
ESG claims (Delmas & Burbano, 2011). This is partic-
SMEs’ stakeholders by different means of information
ularly relevant in the SME sector, where resources for
delivery. The choice between signaling and certifica-
extensive ESG reporting may be limited, increasing the
tion depends on various factors, including the firm’s
incentives for greenwashing. While we do not develop
size and resources, industry norms, and the level of
a formal hypothesis regarding the relative effectiveness
skepticism among stakeholders regarding ESG claims
of ESG signaling and ESG certification in SMEs, we
(Delmas & Montes-Sancho, 2011; Potoski & Prakash,
do explore empirical differences in Section 4.
2005). The substitutability is also influenced by mar-
ket dynamics and stakeholder perceptions. In markets
2.3 Paris Agreement on Climate Change: institutional
where greenwashing is prevalent, stakeholders might
pressure role
prefer certification over signaling, valuing the exter-
nal verification that certification provides (Delmas & The impact of sustainability on the performance of
Burbano, 2011). Conversely, in markets where firms SMEs may be contingent on institutional pressures.
Institutional theory holds that the social and polit-
7 Acknowledging recent debate about costliness of signals, we ical environment nudges organizations into behav-
note that our paper is agnostic about the extent to which a sig-
ioral conformity (DiMaggio & Powell, 1983; Meyer &
nal must be costly for the sender to create a separating equi-
librium, thus allowing costless cues to have signaling value in Rowan, 1977). Organizations willingly conform with
line with the accounting literature (e.g., Crawford and Sobel institutional pressures in their pursuit of legitimacy
Crawford and Sobel; Stocken, 2000; Gigler, 1994). Even from an (Scott, 2005). When this legitimacy is at risk, organiza-
entrepreneurial process perspective, costless cues may be infer-
tions adopt socially demanded practices. Berrone et al.
ential for SMEs’ sustainability orientation as they may inform
about how entrepreneurs intent to ultimately enact sustainability (2013) argue that regulatory and normative pressures
initiatives (Muñoz & Dimov, 2015). are critical drivers of the adoption of socially compliant
managerial practices that foster environmental stew-

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Is sustainable entrepreneurship profitable? ESG disclosure and the financial performance of SMEs 1541

ardship. Regulation explicates formal rules that define vate investment to socially responsible firms (Bruno &
rights and obligations, compensations, and sanctions. Lagasio, 2021) through enhancements in transparency
Norms, on the other hand, guide behavior through less- and comparability of firms’ environmental and social
explicit, commonly agreed-upon values and emerging performance (European Commission, 2023b; Securi-
standards (Scott, 2005). Regulatory pressures might act ties and Exchange commission, 2022). In Spain, our
as a prerequisite for normative pressures to exert their sample country, as described in Section 3, firms not
full influence. For example, the U.S. Environmental complying with NDCs may face sanctions and other
Protection Agency’s requirement to report toxic chem- regulatory costs if they behave in a way that violates
ical emissions to its Toxic Release Inventory (TRI) Spain’s NDCs.
has increased the transparency of facility-level toxic Spain is one of the countries most vulnerable to
emissions, which is a necessary condition for norma- climate change, experiencing increases in tempera-
tive pressures to emerge in reference to the TRI (U.S. ture, extreme variations in rainfall, and droughts. These
Environmental Protection Agency, 2022). changes are affecting future water availability and have
One example of how institutional pressures may lead important implications for sectors such as agriculture,
to environmental stewardship is the widely publicized livestock, forestry, and tourism (Government of Spain,
case of Mossville, Louisiana (Kim et al., 2019). After 2021a). Since the adoption of the Paris Agreement,
Mossville had gained notoriety as a regional “brown- the national government has developed different poli-
field” due to the disclosure requirements pertaining to cies and regulations to reduce greenhouse gas emis-
toxic emissions (regulatory pressure), a group of 300 sions and promote sustainable development. Some of
institutional investors under the patronage of the Inter- them are the Climate Change Law (Government of
faith Center on Corporate Responsibility and Mossville Spain, 2021b) and the National Energy and Climate
Environmental Action Now crafted a petition addressed Plan (2021–2030) (Government of Spain, 2021d). Cur-
to two of the main regional polluters (PPG Indus- rently, the regulation does not impose any obligations
tries and Conoco Phillips), setting forth their pollution on unlisted SMEs. However, it has encouraged SMEs to
abatement proposals (normative pressures). access subsidies for energy efficiency projects, finan-
The 2015 adoption of the Paris Agreement on Cli- cial aid for the installation of renewable energy sys-
mate Change, which marked the first legally binding tems, and subsidies for the development of green tech-
global accord to combat climate change, created both nologies and training programs.
regulatory and normative pressures for firms to act more The Paris Agreement also increased normative pres-
sustainably. The Paris Agreement mandates its 196 sig- sures, which is evidenced by the rise of ESG-themed
natories to work towards three objectives: (i) limiting assets from USD 22.8 trillion in 2016 to USD 35 tril-
global temperature increase to below 2 degrees Celsius lion in 2020, with a projected USD 50 trillion in 2025
over pre-industrial levels and to strive for an increase (Bloomberg, 2022). Normative pressures on SMEs
below 1.5°C; (ii) improving resilience to adverse cli- emerge arguably in large part from the risk associated
mate events; and (iii) establishing finance flows con- with regulatory changes to transform the global econ-
sistent with the first two goals (UNFCCC, 2015). omy in order to avert climate change and abate unsus-
The Paris Agreement created regulatory pressures tainable practices (Krueger et al., 2020; Semieniuk et
because participating countries, in order to meet the al., 2021; Stroebel & Wurgler, 2021). Examples include
objectives, are bound to outline nationally determined the increases in carbon dioxide prices (Huppmann et
contributions (NDCs) detailing national greenhouse al., 2018; Masson-Delmotte et al., 2018; Semieniuk et
gas reduction targets and proposed regulatory actions al., 2021), the stifling of high-emission sectors through
to achieve them. NDCs are updated in 5-year cycles, subsidies for green industries (European Commission,
becoming increasingly ambitious (UNFCCC, 2015). 2019; Semieniuk et al., 2021; The Congress of the
Regulatory actions to curb emissions include tax credits United States, 2022), and the promotion of responsible
and funding for clean technologies (Boston Consulting investments on financial markets, e.g., through lend-
Group, 2022; The Congress of the United States, 2022), ing quotas (Campiglio et al., 2018; Semieniuk et al.,
carbon pricing schemes with increasing prices (Euro- 2021; Volz, 2017). Several empirical studies reveal that
pean Commission, n.d.), and efforts to redirect pri- markets already price in regulatory risk, a reflection of

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1542 PP. Momtaz, IM. Parra

normative pressures for SME decision-makers (Bolton managerial competence, arguing that CSR may create a
& Kacperczyk, 2021; Boubaker et al., 2020; Ilhan et separating equilibrium that reveals to the market which
al., 2021; Jiraporn et al., 2014; Palea & Drogo, 2020; firms are run by good managers. In keeping with this,
Seltzer et al., 2022). Kim et al. (2021) show that CSR is associated with
Therefore, we expect the 2015 Paris Agreement on lowering a firm’s implied volatility, a measure for how
Climate Change to have amplified the relation between well a firm is run.
ESG-related information disclosure and firm perfor- Taken together, the sustainability-as-insurance argu-
mance; specifically, more sustainable SMEs should ment suggests that SMEs might willingly bear costs
have outperformed less sustainable SMEs after the for sustainability in good times in order to build
Paris Agreement. moral capital that insures SMEs against reputation-
related damages in bad times by impacting stake-
H3: The relation between sustainability and SME per- holders’ assessments of the SMEs’ responsibility for
formance is amplified by the Paris Agreement. the bad outcome (Koh et al., 2014; Minor & Mor-
gan, 2011; Peloza, 2006). SMEs for which bad states
2.4 Sustainability as insurance against SME failure might quickly become existential threats might there-
fore particularly benefit from sustainability orientation
A large body of management scholarship argues that in good times; thus, SMEs with higher performance
corporate social responsibility builds valuable social volatility and hence an increased risk of failure might
capital. Moral capital theory submits that stakeholders profit more from communicated sustainability orien-
ascribe moral capital to corporate activities that entail tation (Garrido-Ruso et al., 2024). In a similar vein,
positive externalities (i.e., are at least partially altruis- Kim et al. (2021) find sustainability expenses to lower
tic). Moral capital is often thought of as an insurance a firm’s implied equity volatility. Extrapolating the evi-
mechanism. Godfrey (2005) argues that moral capital dence, sustainability orientation should lower SMEs’
protects relationship-based assets on the occasion of performance variability, thus reducing their risk of fail-
value-destroying events by attenuating stakeholders’ ure, which is especially desirable for SMEs with high
assessments of the impact of such events, safeguard- ex-ante performance variability. Therefore, we expect
ing shareholder value. Moral capital theory is related that the sustainability–firm performance relation, as
to the resource-based view (Barney, 1991; Wernerfelt, hypothesized in Section 2.1, to be positively moderated
1984), which contends that a firm’s tangible and intan- in SMEs with higher historic performance volatility.
gible resources (e.g., reputation) are the primary source
of its long-term competitive advantage. In keeping with H4: The relation between sustainability and SME per-
moral capital theory, Peloza (2006) and Minor and Mor- formance is amplified in firms with high performance
gan (2011) describe CSR-as-insurance by suggesting variability.
that expenses for CSR when the economy is doing well
can be regarded as an insurance premium that buffers
against the realization of reputational risk in times of 3 Data
economic turbulence.
Several empirical studies demonstrate insurance- 3.1 Data sources
like properties of sustainable corporate behavior. Cheng
et al. (2014) find higher transparency and greater stake- Our longitudinal sample consists of 527 non-listed
holder engagement to be linked to superior CSR per- Spanish medium-sized enterprises (SMEs) over the
formance, leading to fewer financial constraints. Shiu 2012–2022 period, geographically distributed through-
and Yang (2017) find long-term CSR engagement to out the 17 autonomous communities of Spain, and
protect stock and bond prices during adverse events. belonging to 17 different industries (i.e., NAICS clas-
Koh et al. (2014) find the protection to be stronger for sifications).
financially stable and socially accepted firms. Godfrey To achieve our objective of compiling a sample of
et al. (2009) view CSR-related expenses as a signal of non-listed SMEs for the analysis of their non-financial

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Is sustainable entrepreneurship profitable? ESG disclosure and the financial performance of SMEs 1543

information, we utilized the Bureau van Dijk’s SABI taxes, and interests) from its revenues (in thousands of
database, which provides financial and ownership data. euros). For analysis purposes, this variable has been
We applied the following criteria: only corporate, non- logarithmically transformed (natural logarithm of net
listed, active companies with an available website; income plus one).
financial information reported in 2021; no sharehold-
ers possessing more than 50% ownership; to present 3.2.2 Independent variables
the Trucost environmental score for their respective
industry; and classification within the European Com- ESG signal Given that it is not mandatory for non-
mission’ (2003) medium enterprise category, which listed SMEs to report ESG information, we use a con-
includes firms with 50 to 250 employees and 10 to 43 servative dummy variable ESG signal to capture this.
million euros in assets. The search criteria resulted in The variable equals one if the SME provides ESG infor-
a total of 625 companies. mation on its website and zero otherwise (e.g., Kolk and
Subsequently, firms’ websites were analyzed, and Perego, 2010).
these were classified as ESG-oriented if they reported
ESG certification As a measure of SMEs’ exogenous
non-financial information on ESG by the end of 2022
sustainability orientation, the dummy variable ESG
(384 firms); otherwise, they were classified as non-
certification was constructed following Testa et al.
ESG-oriented (143 firms). In addition, SMEs with web-
(2014). This variable represents the adoption of inter-
site errors and those that did not have their own web
national standards in the management of quality (ISO
page, but rather a corporate web page for the group to
9001), environment (ISO 14001), occupational health
which they belonged, were eliminated.
and safety (ISO 45001), energy (ISO 50001), and food
The ESG-oriented companies’ websites were then
safety (ISO 22000) and takes the value one if the com-
manually retrieved from the Internet Archive’s Way-
pany has any of these ISO certifications, and zero other-
back Machine ([Link] to collect the
wise. All these ISO standards are associated with ESG
sustainability-related and other non-financial informa-
principles and constitute a guarantee of their integra-
tion over the entire 2012–2022 sample period.
tion into the business.
The sampling procedure led to a final sample of
527 firms and an imbalanced panel of 3521 SME-year
observations. 3.2.3 Moderating variables
Of the total number of companies reporting ESG
Paris Agreement The Paris Agreement was a climate
information on their websites, 77% have some external
and environmental milestone, as most UN countries
certification. ESG-oriented firms (31 years) are slightly
agreed at the UNFCCC COP21 conference to limit
older than non-ESG-oriented firms (25 years). In addi-
global temperature rise, strengthen measures to address
tion, their net income appears to be higher on average
climate change, and develop financial resources consis-
(790,490 euros) than those of non-ESG-oriented com-
tent with the new low-emission economic development
panies (581,810 euros).
pathway (UNFCCC, 2015). In order to analyze the
impact of this agreement on the ESG practices of SMEs,
3.2 Variable definitions and following Monasterolo and de Angelis (2020), our
dummy variable Paris Agreement equals one for peri-
3.2.1 Dependent variable ods after the adoption of the Paris Agreement (from
2017 onwards) and zero for earlier periods. Although
Net income To measure financial performance, market
this agreement was reached on 12 December 2015, a
ratios are typically used to capture investors’ expecta-
1-year transition period is considered, so the starting
tions of future value (Post & Byron, 2015). Following
period is 2017.
the literature on SMEs (Miroshnychenko et al., 2017;
Roffia et al., 2022), we rely on accounting measures, in Volatility ESG investment is used by companies as an
particular net income, given that these are unlisted com- insurance mechanism against the risk of insolvency and
panies. The variable net income represents the firm’s price volatility in the market (Kim et al., 2021). To eval-
profit after deducting all its expenses (general expenses, uate this argument of CSR as risk insurance, we use

123
1544 PP. Momtaz, IM. Parra

financial performance volatility as a moderating vari- insolvency risk invest less resources in ESG manage-
able. This variable is calculated as the annual standard ment initiatives (Mishra & Modi, 2013).
deviation of natural logarithm of net income and is used Intangibles Intangible resources have been shown to
as a measure of the risk of failure for SMEs. shape environmental management practices (Surroca
et al., 2010), so we include intangible assets as a con-
3.2.4 Instrumental variables trol variable. Intangibles represent the intangible fixed
assets in thousands of euros.
Disaster deaths and disaster damages Natural and Fixed effects Industry (NAICS sector codes) and cale-
technological disasters frequently have long-term con- ndar-year fixed effects are also included. Industry
sequences for regional economies. These events lead to is an important factor to control for, as ESG prac-
tragic loss of life and result in the destruction of both tices can vary considerably among industries. These
public and private infrastructure, significantly disrupt- differences can come from government regulation,
ing economic and social activities. In response, pub- consumer-oriented nature of companies, and public vis-
lic administrations endeavor to adapt traditional infras- ibility (Waddock & Graves, 1997).
tructure to enhance its resilience. Such investments can
be considered sustainable and are complementary to
standard investment. They not only provide the capac- 3.3 Methodology: a staggered
ity to withstand the impacts of disasters but also foster difference-in-differences approach
private investment in sustainable initiatives (Marto et We employ a staggered difference-in-differences app-
al., 2018). Given that disasters could serve as an exoge- roach to estimate the effects of ESG-related informa-
nous explanatory variable for the level of ESG disclo- tion disclosure on SMEs’ financial performance over
sure of a company, we define two potential instrumen- an 11-year period. Our goal is to compare the evolu-
tal variables. Disaster deaths represent the number of tion of SMEs’ net income that is attributable to SMEs’
deaths, whereas disaster damages refer to the monetary ESG-related information disclosure relative to SMEs
amount of damages resulting from natural and techno- without such disclosure in a certain year or never.
logical disasters in the Spanish autonomous community We follow the approach in Callaway and Sant’Anna
(e.g. Andalucia, Murcia,...) where the firm is located. (2021) and exploit the our sample’s property that ESG-
The information was retrieved from the International related information disclosure happens for some SMEs
Disaster Database (EM-DAT). in some years and for others in other years or never,
allowing us to group by disclosure event length (i.e., the
3.2.5 Controls difference between the current time and the time when
the company starts its disclosure) in order to analyze
Firm age and size Older and larger firms tend to accu- whether the trend of SMEs’ net income remains parallel
mulate more learning and financial resources that might before and after treatment (parallel trend assumption),
enable them to implement environmental, social, and as well as how the duration of exposure to treatment
corporate governance practices (Miroshnychenko et affects SMEs’ financial performance.
al., 2024). Larger firms are also subject to greater pub- For the baseline analysis, we estimate the following
lic scrutiny, which encourages the disclosure of ESG simplified model Eq. 1:
information (Ben-Amar et al., 2017; Reverte, 2009). N et incomei,t = αi,t + β0 Disclosur ei,t
Therefore, age and size are used as control variables.
Firm age is calculated by using firms’ date of incorpo- 
4
+ βz Contr olsi,t +δt +θi +εi,t , (1)
ration, while size is obtained by the natural logarithm z=1
of total number of employees plus one.
where N et income is the dependent variable represent-
Indebtedness This variable measures the company’s ing the financial performance and Disclosur e is the
level of solvency and is calculated as the division independent variable which measures the ESG-related
between total debt and total assets. We incorporate information disclosure by firm i at time t. This dis-
indebtedness as a control variable since it has been closure of information can be done through two meth-
empirically demonstrated that companies with higher ods: ESG information published endogenously on the

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Is sustainable entrepreneurship profitable? ESG disclosure and the financial performance of SMEs 1545

web (ESG signal variable) and ESG information pub- debt. In addition, the annual volatility of net income
lished on the web exogenously based on an ISO cer- shown by these firms appears quite high, with a median
tificate (ESG certification variable). Control variables of 28%. The sustainability proxy variables show that
concerning the characteristics of a given firm i at time 48% of our sample disclose ESG signals, while 40%
t are also incorporated into the model. These variables have some kind of ESG certification.
are firm age and size, the level of indebtedness, and the The correlation matrix in Table 2 shows that ESG
investment in intangible assets. The independent vari- signals and ESG certification are positively and signif-
able E SG and all the control variables except age are icantly correlated with net income, which is in line with
lagged one period to account for the time lag between the hypotheses to be tested. It is also observed that age
changes in these variables and their reflection in net and size, as well as higher investment in intangibles, are
income changes. δt represents year fixed effects. θi is correlated with higher net income. Conversely, higher
a vector of industry fixed effects that refers to the indi- volatility and level of indebtedness are associated with
vidual effect of each industry and allows us to account lower net income.
for unobservable time-invariant fixed effects. εi,t is the Firm age and size are positively related with firms
error term. Lastly, in order to prevent potential het- disclosing ESG information and having some ESG cer-
eroscedasticity problems in the residuals, the equations tification. Age also appears to be positively correlated
are estimated considering clustered standard errors at to firm size (i.e., the older the firm, the larger the size)
the industry level. and negatively related to investment in intangibles (i.e.,
We modify our baseline model for additional analy- the younger the firm, the larger the investment). In addi-
ses and describe the modifications below, where appli- tion, the larger a company is, the greater its invest-
cable. ment in intangibles seems to be. Lastly, a higher level
of indebtedness is associated with younger firms and
higher volatility.
3.4 Summary statistics
Summary statistics are in Table 1. SMEs in our sample 4 Empirical results
have a mean net income of 654.8 thousand euros. On
4.1 Main results
average, these are established SMEs that have been in
business for 28 years. The mean number of employ- 4.1.1 ESG-related information disclosure and SMEs’
ees is 84. There is some variability in the investment financial performance
in intangibles made by the firms in the sample. These
companies exhibit reasonable levels of indebtedness, Figure 1 illustrates the per-annum average treatment
with around 53.5% of their assets being financed with effects of ESG-related information disclosure on the

Table 1 Summary statistics

Mean SD Q1 Median Q3

Panel A: Summary statistics for key variables

Net income, in EUR k 654.80 1207.05 124.10 414.32 1002.00

ESG signal 0.48 0.50 0.00 0.00 1.00
ESG certification 0.40 0.49 0.00 0.00 1.00
Panel B: Summary statistics for control and moderating variables
Paris Agreement 0.45 0.50 0.00 0.00 1.00
Volatility 0.44 0.48 0.12 0.28 0.57
Firm age 28.61 14.67 19.00 28.00 37.00
Firm size 84.34 50.18 51.00 72.00 105.00
Indebtedness 53.49 25.27 36.13 53.65 71.59
Intangible assets 268.71 799.70 7.20 32.15 167.48

123
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123
Table 2 Correlations
1. 2. 3. 4. 5. 6. 7. 8. 9.

1. Net income 1.000

2. ESG signal 0.091*** 1.000
3. ESG certification 0.052*** 0.717*** 1.000
4. Paris Agreement −0.268*** −0.218*** −0.163*** 1.000
5. Volatility −0.255*** 0.011 −0.001 0.019 1.000
6. Firm age 0.118*** 0.196*** 0.168*** −0.164*** 0.021 1.000
7. Firm size 0.288*** 0.195*** 0.155*** −0.327*** −0.017 0.225*** 1.000
8. Indebtedness −0.370*** 0.011 0.011 0.017 0.141*** −0.253*** 0.001 1.000
9. Intangible assets 0.085*** −0.040** −0.034* −0.056*** 0.017 −0.049*** 0.095*** −0.009 1.000

Note: Statistical significance is denoted by ***, **, and *, corresponding to 1%, 5%, and 10% levels
PP. Momtaz, IM. Parra
Is sustainable entrepreneurship profitable? ESG disclosure and the financial performance of SMEs 1547

Fig. 1 Annual average

treatment effects of ESG

2
disclosure on SMEs’
financial performance.
Notes: The figure presents

Average treatment effect on financial performance

1.5
the per-annum average
treatment effects of
ESG-related information
disclosure on SMEs’ net

1
income, in EUR k., ln., for
the [–8, +8] window in
years around the disclosure
.5
year t=0 on the x-axis. The
model relies on the
staggered
difference-in-differences
0

model defined in 1 in
Section 3.3. The whiskers
span the 5% confidence
interval of the treatment
-.5

effects
-8 -6 -4 -2 0 2 4 6 8
Treatment periods, with ESG disclosure at t=0

financial performance of SMEs for the [–8, +8] event try fixed effects to absorb both time-related and sectoral
window in years around the disclosure year, obtained variation. All reported standard errors are robust. The
from our staggered difference-in-differences model. R2 in all of our models is in the 17–21% range, which
The black line for the pre-disclosure years, represent- is similar to related studies of the impact of ESG on
ing the difference in treated and control observations’ firm performance, albeit slightly lower (which is not
financial performance before the treatment, is statisti- surprising, given our larger sample and longer sample
cally non-significant and oscillates closely around zero, period) (e.g., Mansouri and Momtaz, 2022).
supporting the parallel trends assumption underlying Panel A of Table 3 presents a consistently positive
our framework. The grey line for the post-disclosure and significant average treatment effect of the endoge-
years, representing the difference in treated and con- nous ESG signal proxy on SMEs’ ln-transformed net
trol observations’ financial performance after the treat- income. Model (1) in the first column tests the effect
ment, starts to diverge upward with a short time lag. with only the variable of interest and our year- and
There is a clear upward trend starting in t=2 and becom- country-fixed effects, indicating a statistically signif-
ing (and staying) statistically significantly different icant coefficient of 0.193, with a p-value < 5%. In
from the null, that is, there is a treatment effect of economic terms, the estimated coefficient suggests that
ESG disclosure on SMEs’ financial performance. Thus, the disclosure of an ESG certification leads to an
the graphical evidence suggests ESG-related informa- increase in the disclosing SME’s net income of 21.3%
tion disclosure, both endogenous and exogenous, is (=(exp(0.193)−1)×100). In absolute terms, the effect
an important determinant of SMEs’ financial perfor- means that the average SME increases its net income
mance. Next, we examine the robustness of this relation with the disclosure of an ESG certification by 0.12
in a multivariate model. (=21.3% × average net income of 654.80 divided by
Table 3 shows the main results for the first hypothe- standard deviation of net income of 1207.05) standard
ses that ESG signaling (Hypothesis 1a) and ESG certifi- deviations. Gradually adding control variables in Mod-
cation (Hypothesis 1b) positively impact SMEs’ finan- els (2) to (5) modifies the estimated treatment effect
cial performance. Panel A tests the impact of endoge- slightly, with an estimated range between 0.185 (Model
nous ESG signals on the financial performance of (4)) and 0.293 (Model (5)).
SMEs, while Panel B tests the impact of exogenous For the control variables, we find—consistent with
ESG certifications. All models include year and indus- the entrepreneurial and corporate finance literature—

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1548 PP. Momtaz, IM. Parra

Table 3 ESG signaling and ESG certification

Dependent variable: net income, in EUR k, ln.
(1) (2) (3) (4) (5)

Panel A: ESG signals and firm performance in SMEs

ESG signal 0.193** 0.193** 0.186** 0.185** 0.293**

(0.088) (0.088) (0.080) (0.083) (0.103)
Firm age 0.147*** 0.123*** 0.120*** 0.113***
(0.014) (0.014) (0.014) (0.014)
Firm size 0.347*** 0.361*** 0.388***
(0.088) (0.093) (0.081)
Indebtedness −0.006* −0.007**
(0.003) (0.003)
Intangible assets −0.000**
(0.000)
Year FE     
Industry FE     
Observations 3060 3060 3028 3028 2564
R2 0.1756 0.1756 0.1868 0.1903 0.1796
Panel B: ESG certification and firm performance in SMEs

ESG certification 0.202** 0.202** 0.191** 0.183** 0.210**

(0.093) (0.093) (0.076) (0.080) (0.093)
Firm age 0.134*** 0.125*** 0.122*** 0.119***
(0.013) (0.011) (0.010) (0.011)
Firm size 0.366*** 0.378*** 0.339***
(0.094) (0.097) (0.079)
Indebtedness −0.005 −0.005
(0.003) (0.003)
Intangible assets −0.000
(0.000)
Year FE     
Industry FE     
Observations 3521 3521 3289 3289 2792
R2 0.2053 0.2053 0.1934 0.1953 0.1722

Notes: Panel A presents the results of the relation between endogeneous ESG signals and SMEs’ financial performance. Panel B
presents the results of the relation between exogeneous ESG certifications and SMEs’ financial performance. The dependent variable is
the ln-transformed net income in EUR k. All variables are defined in Section 3. Year and industry fixed effects are included. Standard
errors are in parentheses. Statistical significance is denoted by ***, **, and *, corresponding to 1%, 5%, and 10% levels

that SMEs’ net income statistically significant (i) and our year- and country-fixed effects. We find a statis-
increase in firm age and (ii) firm size, and decrease tically significant coefficient of 0.202, with a p-value
in (iii) indebtedness and (iv) intangible assets. < 5%. In economic terms, the estimated coefficient
Panel B of Table 3 presents a consistently positive suggests that the disclosure of an ESG certification
and significant average treatment effect of the exoge- leads to an increase in the disclosing SME’s net income
nous ESG certification proxy on SMEs’ ln-transformed of 22.4% (=(exp(0.202)−1)×100). Thus, the positive
net income. As in Panel A, Model (1) in the first col- effect of ESG-related disclosure on SMEs’ financial
umn tests the effect with only the variable of interest performance is slightly stronger for exogenous ESG

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Is sustainable entrepreneurship profitable? ESG disclosure and the financial performance of SMEs 1549

certifications compared to endogenous ESG signals. In financial performance, even when conditioning on both
absolute terms, the effect means that the average SME information types in the same regression model. Impor-
increases its net income with the disclosure of an ESG tantly, the interaction between the two information
certification by 0.12 (=22.4% × average net income of types is statistically significantly negative across all
654.80 divided by standard deviation of net income of model specifications. The estimated coefficients range
1207.05) standard deviations. Gradually adding con- from −0.483 to −0.445. Thus, for the example of
trol variables in Models (2) to (5) modifies the esti- Model (1) in the first column, the negative interac-
mated treatment effect slightly, with an estimated range tion terms suggest that 59.7% (=0.445/(0.376+0.370))
between 0.183 (Model (4)) and 0.210 (Model (5)). For of the information contained in contemporaneous ESG
the control variables, we find consistent coefficients signals and ESG certification is overlapping informa-
that are similar to those in Panel A. tion. In economic terms, this suggests that the simul-
Overall, the findings lend strong support to Hypothe- taneous disclosure of an ESG signal and an ESG cer-
ses 1a and 1b in Section 2.1 according to which tification leads to an net average treatment effect of
ESG signaling and ESG certification positively impact 0.301 (=0.376+0.370 −0.445 for Model (1) in the first
SMEs’ financial performance, respectively. Next, we column). Thus, the net average treatment effect sug-
explore whether ESG signaling and ESG certification gests that the simultaneous disclosure of both informa-
offer similar or different information for the prediction tion types increase the average SME’s net income by
of SMEs’ financial performance. 35.1% (=exp(0.301)), which means, in absolute terms,
an increase in net income by 19.0% (=35.1% × aver-
age net income of 654.80 divided by standard deviation
4.1.2 ESG signaling and certification: informational
of net income of 1207.05) standard deviations. There-
substitutes
fore, endogenous ESG signals and exogenous ESG cer-
tifications are to some extent information substitutes,
Against the pervasive evidence on greenwashing, that
supporting our Hypothesis 2 in Section 2.2.
is, the practice of making corporate activities appear
more sustainable than they actually are (Wu et al.,
2020), it is a natural next question for our research 4.2 Moderation results
whether endogenous ESG signals bear the same infor-
mation content as exogenous ESG certifications. We 4.2.1 Paris Agreement on Climate Change
explore this question by modifying our baseline model
According to our Hypothesis 3, the relation between
in Eq. 1 as follows:
ESG-related information disclosure and SMEs’ finan-
N et incomei,t = αi,t + β0 E SG signali,t−1 cial performance is amplified by the Paris Agreement
+β1 E SG cer ti f ication i,t on Climate Change. To test this hypothesis, we modify
our baseline model in Eq. 1 as follows:
+β2 E SG signali,t−1
×E SG cer ti f ication i,t + N et incomei,t = αi,t + β0 E SG signali,t−1

4 +β1 E SG cer ti f ication i,t

+ βz Contr olsi,t +δt +θi +εi,t .(2) +β2 Paris Agr eementt
z=3
+β3 E SG signali,t−1
where all variables are as defined for Eq. 1 in Sec- ×Paris Agr eementt
tion 3.3, and the interaction between ESG signal and
+β4 E SG cer ti f ication i,t
ESG certification represents a test for whether both
information types are substitutes against the null that ×Paris Agr eementt
they contain different and unrelated information. 4

The regression results in Table 4 confirm the results + βz Contr olsi,t+δt+θi +εi,t , (3)
in Panels A and B of Table 3 that both ESG signals z=5

(coefficients in the 0.374−0.493 range) and ESG certi- where all variables are as defined for Eq. 1 in Section
fications (coefficients in the 0.354−0.373 range) carry 3.3, and the interactions between the Paris Agreement
important information for the prediction of SMEs’ and ESG signal and ESG certification, respectively,

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1550 PP. Momtaz, IM. Parra

Table 4 ESG signaling and ESG certification: informational substitutes

Dependent variable: net income, in EUR k, ln.
(1) (2) (3) (4) (5)

ESG signal × ESG certification −0.445** −0.445** −0.450** −0.447*** −0.483**

(0.184) (0.184) (0.156) (0.145) (0.174)
ESG certification 0.370** 0.370** 0.361** 0.354** 0.373**
(0.136) (0.136) (0.125) (0.122) (0.153)
ESG signal 0.376** 0.376** 0.374** 0.374** 0.493**
(0.154) (0.154) (0.138) (0.134) (0.174)
Firm age 0.145*** 0.121*** 0.117*** 0.110***
(0.016) (0.016) (0.016) (0.015)
Firm size 0.343*** 0.357*** 0.377***
(0.091) (0.095) (0.083)
Indebtedness −0.007** −0.008***
(0.003) (0.003)
Intangible assets −0.000**
(0.001)
Year FE     
Industry FE     
Observations 2815 2815 2786 2786 2355
R2 0.1767 0.1767 0.1882 0.1919 0.1809

Notes: The table presents the results of the simultaneous relation between endogeneous ESG signals and exogeneous ESG certifications
with SMEs’ financial performance. The dependent variable is the ln-transformed net income in EUR k. All variables are defined in
Section 3. Year and industry fixed effects are included. Standard errors are in parentheses. Statistical significance is denoted by ***,
**, and *, corresponding to 1%, 5%, and 10% levels

represent a test for whether the Paris Agreement mod- between endogenous ESG signals and SMEs’ finan-
erated the relation between both information types and cial performance is significantly negative. The diverg-
SMEs’ financial performance. ing effects suggest that the Paris Agreement on Cli-
Table 5 shows the moderating effects of the Paris mate Change initiated institutional change in a way that
Agreement on Climate Change on endogenous ESG it increased the information content of greenwashing-
signals, exogenous ESG certification, and both disclo- robust exogenous ESG certifications, while penalizing
sure types in Models (1), (2), and (3), respectively. The greenwashing-prone endogenous ESG signals. Over-
regression results indicate that the Paris Agreement all, the findings partially support our Hypothesis 3 in
impacted the relation between exogenous ESG certi- Section 2.3.
fications and SMEs’ financial performance across all
model specifications (2) and (3), but not that between 4.2.2 Sustainability-as-insurance effect
endogenous ESG signals and SMEs’ financial perfor-
mance in (1). In Model (2), the interaction coefficient Next, we analyze the use of ESG-related informa-
is 0.237, with a p-value < 1%, while the coefficient tion disclosure as a strategy to reduce the risk of fail-
on ESG certification is 0.236, suggesting that the Paris ure in SMEs, following the theoretical work by God-
Agreement doubled the economic importance of ESG frey (2005), Godfrey et al. (2009). We test our fourth
certifications for SMEs’ net income. Interestingly, in hypothesis, which posits that the relation between ESG-
Model (3), the interaction effect between exogenous related information disclosure and SME performance
ESG certifications and SMEs’ financial performance is is amplified in firms with high performance variability,
significantly positive and similar in magnitude to that with the following model:
estimated in Model (2), whereas the interaction effect N et incomei,t = αi,t + β0 E SG signali,t−1

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Table 5 Effect of the Paris Agreement on ESG disclosure and SME performance
Dependent variable: net income, in EUR k, ln.
(1) (2) (3)

ESG signal 0.347*** 0.344***

(0.085) (0.106)
ESG certification 0.236*** 0.142
(0.070) (0.110)
Paris Agreement −0.618*** −0.770*** −0.631***
(0.061) (0.058) (0.065)
ESG signal × Paris Agreement 0.044 −0.139**
(0.091) (0.063)
ESG certification × Paris Agreement 0.237*** 0.289**
(0.117) (0.135)
Industry FE   
Observations 3060 3521 2815
R2 0.1130 0.1372 0.1137

Notes: The table presents the results of the moderation effect of the Paris Agreement on Climate Change on the relation between
ESG-related information disclosure and SMEs’ financial performance. The dependent variable is the ln-transformed net income in EUR
k. All variables are defined in Section 3. Year and industry fixed effects are included. Standard errors are in parentheses. Statistical
significance is denoted by ***, **, and *, corresponding to 1%, 5%, and 10% levels

+β1 E SG cer ti f ication i,t that on the interaction between endogenous ESG sig-
+β2 Per f or mance V olatilit yi,t nals and SME-level performance variability is 0.229.
Thus, performance volatility helps double the posi-
+β3 E SG signali,t−1
tive effect of ESG signals on SMEs’ financial perfor-
×Per f or mance V olatilit yi,t mance. Conditioning on exogenous ESG certifications
+β4 E SG cer ti f ication i,t in Model (3), this interaction effect even increases from
×Per f or mance V olatilit yi,t 0.229 to 0.335. Interestingly, in Models (2) and (3), the
moderating effect of SME-level performance volatil-
4
+ βz Contr olsi,t+δt+θi +εi,t , (4) ity on the relationship between ESG certification and
z=5 net income is non-significant. A possible explanation
where all variables are as defined for Eq. 1 in Section for this finding, according to Godfrey et al. (2009), is
3.3, and the interactions between SME-level Volatil- that the sustainability-as-insurance argument rests on
ity and ESG signal and ESG certification, respectively, the premise that ESG orientation helps to build moral
represent a test for whether SMEs with increased failure capital, which, in a negative event of SME (partial)
risk benefit more from ESG-related information disclo- failure, mitigates stakeholders’ negative assessments of
sure. the SME. Because moral capital is strongly related to
The results in Table 6 show that the positive effect entrepreneurial and managerial intentions and related
of endogenous ESG signals on SMEs’ financial per- latent traits, it is plausible that endogenous signals have
formance is reinforced when firms go through peri- greater information content.
ods of greater uncertainty (i.e., when their net income
fluctuates to a greater extent), suggesting that compa- 4.3 Post-hoc analyses: SMEs in green vs. brown
nies benefit more from their ESG disclosure efforts industries
when their financial situation is unfavorable, providing
support for the sustainability-as-insurance argument as Previous scholarship has shown that green firms out-
posited by Hypothesis 4 in Section 2.4. In Model (1), the perform brown firms (Ardia et al., 2023). On this basis,
coefficient on endogenous ESG signals is 0.198, while it is reasonable to assume that the impact of ESG-

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1552 PP. Momtaz, IM. Parra

Table 6 ESG disclosure as risk insurance in SMEs

Dependent variable: net income, in EUR k, ln.
(1) (2) (3)

ESG signal 0.198* 0.099

(0.095) (0.108)
ESG certification 0.184 0.171
(0.137) (0.187)
Volatility −0.473*** −0.442*** −0.465***
(0.072) (0.113) (0.088)
ESG signal × Volatility 0.229*** 0.335*
(0.067) (0.183)
ESG certification × Volatility 0.030 −0.144
(0.222) (0.349)
Control variables   
Year FE   
Industry FE   
Observations 2414 2615 2215
R2 0.2280 0.2202 0.2285

Notes: The table presents the results of the moderation effect of SME-level performance variability on the relation between ESG-related
information disclosure and SMEs’ financial performance, testing the sustainability-as-insurance hypothesis. The dependent variable is
the ln-transformed net income in EUR k. All variables are defined in Section 3. Year and industry fixed effects are included. Standard
errors are in parentheses. Statistical significance is denoted by ***, **, and *, corresponding to 1%, 5%, and 10% levels

related information disclosure on SMEs’ financial per- manufacturing companies account for 36.6% of our
formance might be different for SMEs belonging to sample.
green and brown industries. Thus, to conduct some We test our main result that ESG-related informa-
post-hoc analyses, we divide our sample of compa- tion disclosure impacts the financial performance of
nies into green industries and brown industries and SMEs in green vs. brown industries in Table 7. For
re-estimate the results from Tables 3, 5, and 6 in green industries, we estimate the impact of endogenous
Tables 7, 8, and 9, respectively. ESG signals in Model (1) in the first column and exoge-
Differentiating between green and brown industries nous ESG certifications in Model (2) in the second col-
is a complicated task. Previous studies have focused umn. For brown industries, we estimate the impact of
on ESG scores and CO2 emissions to draw this dis- endogenous ESG signals in Model (3) in the third col-
tinction (Bolton & Kacperczyk, 2021; Drobetz et al., umn and exogenous ESG certifications in Model (4)
2024). However, SMEs do not usually provide infor- in the fourth column. Table 7 reveals significant differ-
mation on their CO2 emissions, nor do they have ESG ences between the two types of industries. Our main
scores; hence, our classification relies on CO2 emis- results are exclusively driven by SMEs in green indus-
sions by industry (i.e., NAICS classifications) at the tries, suggesting that stakeholders might want to give
European level. According to information provided by more credibility to ESG-related information provided
the European Commission, the industries with the high- by SMEs considered greener than to ESG-related infor-
est greenhouse gas emissions at the European and Span- mation provided by high-polluting SMEs. This could
ish level are the manufacturing industry and energy be due to the perception that if a brown company pro-
suppliers (Eurostat, 2023). Thus, we classify as brown vides information on its ESG activities, it is possi-
companies those belonging to the manufacturing sec- bly trying to greenwash its image. The main effects
tor, and those in the remaining sectors as green. This hold regardless of whether the type of information is
classification system suggests itself in our study, as endogenous or exogenous. The coefficient on endoge-

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Table 7 Brown vs. green industries: ESG signaling and ESG certification
Dependent variable: net income, in EUR k, ln.
Green industries Brown industry
(1) (2) (3) (4)

ESG signal 0.305* 0.260

(0.272) (0.156)
ESG certification 0.288* 0.111
(0.144) (0.110)
Firm age 0.126*** 0.126*** 0.085*** 0.107***
(0.012) (0.013) (0.023) (0.024)
Firm size 0.374*** 0.371*** 0.438 0.276
(0.104) (0.102) (0.275) (0.271)
Indebtedness −0.005 −0.003 −0.010* −0.008
(0.004) (0.004) (0.005) (0.006)
Intangible assets −0.000** −0.000* −0.000 −0.000
(0.000) (0.000) (0.000) (0.000)
Year FE    
Industry FE  
Observations 1645 1776 919 1016
R2 0.1957 0.1862 0.1620 0.1586

Notes: This table presents results for our main results in Table 3 for SMEs in green versus brown industries. The dependent variable is
the ln-transformed net income in EUR k. All variables are defined in Section 3. Year and industry fixed effects are included. Standard
errors are in parentheses. Statistical significance is denoted by ***, **, and *, corresponding to 1%, 5%, and 10% levels

nous ESG signals in Model (1) is 0.305 (as compared (as compared to 0.210 in Model (5) in Panel B of
to 0.293 in Model (5) in Panel A of Table 3) and that Table 3). Both coefficients for SMEs in brown indus-
on exogenous ESG certifications in Model (2) is 0.288 tries in Models (3) and (4) for endogenous ESG sig-

Table 8 Brown vs. green industries: Paris Agreement effect

Dependent variable: net income, in EUR k, ln.
Green industries Brown industry
(1) (2) (3) (4) (5) (6)

ESG signal 0.362** 0.264 0.354 0.516*

(0.129) (0.161) (0.243) (0.279)
ESG certification 0.265** 0.216 0.207* 0.007
(0.107) (0.151) (0.117) (0.166)
Paris Agreement −0.649*** −0.805*** −0.670*** −0.516 *** −0.679*** −0.510***
(0.071) (0.068) (0.073) (0.133) (0.134) (0.143)
ESG signal × Paris Agreement 0.154 −0.199* −0.142 −0.141
(0.089) (0.102) (0.169) (0.180)
ESG certification × Paris Agreement 0.366*** 0.465*** 0.017 0.032
(0.114) (0.105) (0.186) (0.216)
Industry FE   
Observations 2031 2324 1901 1029 1197 914
R2 0.1134 0.1399 0.1178 0.1163 0.1366 0.1130

Notes: This table presents results for our main results in Table 5 for SMEs in green versus brown industries. The dependent variable is
the ln-transformed net income in EUR k. All variables are defined in Section 3. Year and industry fixed effects are included. Standard
errors are in parentheses. Statistical significance is denoted by ***, **, and *, corresponding to 1%, 5%, and 10% levels

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1554 PP. Momtaz, IM. Parra

Table 9 Brown vs. green industries: sustainability as risk insurance

Dependent variable: net income, in EUR k, ln.
Green industries Brown industry
(1) (2) (3) (4) (5) (6)

ESG signal 0.262** −0.062 0.018 0.243

(0.113) (0.128) (0.280) (0.315)
ESG certification 0.389*** 0.433** −0.095 −0.164
(0.095) (0.152) (0.142) (0.195)
Volatility −0.401*** −0.313*** −0.370*** −0.693*** −0.721*** −0.706***
(0.072) (0.102) (0.088) (0.232) (0.159) (0.237)
ESG signal × Volatility 0.218* 0.568*** 0.386 0.100
(0.103) (0.140) (0.275) (0.297)
ESG certification × Volatility −0.247* −0.546* 0.545*** 0.502*
(0.132) (0.259) (0.208) (0.255)
Control variables      
Year FE      
Industry FE   
Observations 1543 1656 1440 871 959 775
R2 0.2406 0.2426 0.2565 0.2264 0.2196 0.2134

Notes: This table presents results for our main results in Table 6 for SMEs in green versus brown industries. The dependent variable is
the ln-transformed net income in EUR k. All variables are defined in Section 3. Year and industry fixed effects are included. Standard
errors are in parentheses. Statistical significance is denoted by ***, **, and *, corresponding to 1%, 5%, and 10% levels

nals and exogenous ESG certifications, respectively, use of ESG signaling as a strategy to reduce the risk of
are non-significant. failure only works for companies in the least polluting
Next, we re-estimate the results from Table 5 industries. The second finding is that the use of ESG
whether the moderating effect of the Paris Agree- certification as a strategy to reduce the risk of failure
ment on the positive impact of ESG certification on does not seem to work. One possible explanation for
SMEs’ financial performance holds after differentiat- the latter finding is that greener SMEs devote more
ing between green and brown industries. The results in attention to compliance with ESG-related ISO stan-
Table 8 reveal that the moderating effect of the Paris dards and are more likely to hold these certifications
Agreement only holds for firms belonging, again, only in the first place. The insurance effect might there-
to green industries, suggesting that the Paris Agree- fore be more driven by the information provided by
ment might reinforce the positive effect of ESG cer- companies themselves, as this would differentiate them
tification on SMEs’ financial performance. In Model from other green companies. Overall, it is interesting
(3), testing the impact of ESG signals and ESG cer- to observe that most of our main results are by SMEs in
tifications simultaneously, the interaction effects with green industries, rather than those in brown industries.
the Paris Agreement in green industries are −0.199 This finding echoes the contemporaneous evidence in
(p-value < 10%) and 0.465 (p-value < 1%), respec- Drobetz et al. (2024), which shows that institutional
tively. For brown industries, again, the effects are non- investors improve the ESG performance of their port-
significant and economically insignificant with coeffi- folio SMEs only in those SMEs with ex-ante strong
cients of −0.141 and 0.032 for ESG signaling and ESG ESG performance and not in those with ex-ante weak
certification, respectively. ESG performance, plausibly suggesting that it is more
Lastly, we re-estimate the sustainability-as-insurance attractive to develop sustainable SMEs into ESG cham-
model from Table 6 in 9. The first finding is that the pions, rather than to transform unsustainable SMEs.

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4.4 Robustness analysis engage in ESG reporting when disasters occur in their
region.
Previous research has identified that the relationship In the second stage (see columns 3 and 4), the fit-
between ESG disclosure and financial performance ted values from the first-stage regression—representing
is subject to endogeneity and reverse causality prob- the predicted likelihood of ESG disclosure—are used
lems (Adams & Ferreira, 2009; Liu et al., 2021; as the independent variable in the baseline model
Valls Martínez & Cruz Rambaud, 2019). These con- (model Eq. 1). The results reveal that the positive
cerns may result in biased and inconsistent estimates, impact of ESG signal on net income remains signifi-
potentially compromising the validity of the analysis. cant. Therefore, these findings support the robustness
To address the potential endogeneity issue, which and consistency of our results, even after addressing
arises because companies with greater financial resources potential endogeneity concerns.
might be more likely to engage in ESG initiatives, we
employ an instrumental variables (IV) method using a
two-stage least squares (2SLS) analysis (see, e.g., Hou, 5 Discussion and concluding remarks
2019).
As instruments, we utilize the number of deaths (dis- 5.1 Summary of main results
aster deaths) and the monetary amount of damages
By examining endogenous ESG signals and exoge-
(disaster damages) resulting from natural and techno-
nous ESG certifications in a sample of 527 medium-
logical disasters in the Spanish autonomous community
sized Spanish unlisted companies in the period 2012–
(e.g. Andalucia, Murcia,...) where the firm is located.
2022, we can affirm that the SSOH hypothesis holds,
Before incorporating these instrumental variables
strongly suggesting that SMEs benefit from higher net
into our analysis, we assess their suitability as exoge-
income when they provide information on their sus-
nous instruments. First, we test whether the instruments
tainability orientation. This effect holds regardless of
are correlated with the endogenous variable, specifi-
whether they use endogenous reporting methods, such
cally ESG signal. Additionally, we examine the mod-
as endogenous communication about ESG activities,
els’ F-statistics to confirm the strength of our instru-
or exogenous methods, such as having ISO certifi-
mental variables. Our analysis shows that both disaster
cates. Likewise, the support for the substitution effect
damages and disaster deaths are suitable and robust
between ESG signaling and ESG certification reveals
instruments, as indicated by a significant relationship
that firms can use these two disclosure methods—to
with ESG signal (see column 1 and 2 in Table 10) and
a certain extent—alternatively. In terms of the mod-
an F-statistic higher than 10. Next, it is important to
erating effects of the sustainability–performance bino-
verify that the instrumental variables are uncorrelated
mial, the institutional pressure for sustainable behavior
with the error term. Following Baum et al. (2007), we
exerted by the Paris Agreement has enhanced the value
apply the Hansen J. test, which demonstrates that the
of using exogenous information methods to improve
instruments are valid.
the performance of SMEs. Sustainability orientation
Subsequently, we conduct the 2SLS analysis, whose
also appears to insure SMEs against failure risk and
results are presented in Table 10. In the first-stage
thus could be used as a strategy for navigating high
regression (columns 1 and 2), we estimate the like-
performance volatility. Finally, post-hoc tests show
lihood of a firm disclosing ESG information (ESG
that these findings are primarily driven by SMEs in
signal, dependent variable) in response to a disas-
green (i.e., low-pollution), rather than brown (i.e., high-
ter, using lagged values of disaster deaths and disas-
pollution), industries.
ter damages as independent variables. The regression
also include control variables from the baseline model
(model Eq. 1), such as firm age, size, indebtedness, and 5.2 Theoretical contributions and practical
intangibles. The results indicate that ESG signal is pos- implications
itively and significantly influenced by both the number
of deaths and the amount of damages caused by disas- Our findings, which show a positive impact of both
ters. This suggests that companies are more likely to ESG signaling and ESG certification on SMEs’ finan-

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123
Table 10 Instrumental variable (IV) estimation
First stage First stage Second stage Second stage
Dependent variable: ESG signal Dependent variable: ESG signal Dependent variable: net income Dependent variable: net income
(1) (2) (3) (4)

Disaster damages 0.021**

(0.007)
Disaster deaths 0.003***
(0.001)
ESG signal 6.531* 4.695*
(3.538) (2.463)
Firm age 0.024 *** 0.023 *** −0.029 0.040
(0.006) (0.003) (0.073) (0.067)
Firm size −0.057* −0.038** 0.890*** 0.487***
(0.030) (0.015) (0.309) (0.155)
Indebtedness −0.001 −0.001 0.001 −0.003
(0.002) (0.001) (0.017) (0.007)
Intangible assets 0.000* 0.000 −0.001*** −0.000
(0.000) (0.000) (0.000) (0.000)
Year FE    
Industry FE    
Observations 850 1302 850 1302
R2 0.1204 0.1142 0.0030 0.0099
F−statistics 12.46 47.94

Notes: This table presents instrumental variable analysis results examining the effect of ESG signals on SMEs’ financial performance. The dependent variable in columns (1) and
(2) is the ESG signal. The dependent variable in columns (3) and (4) is the ln-transformed net income in EUR k. Year and industry fixed effects are included. Standard errors are in
parentheses. Statistical significance is denoted by ***, **, and *, corresponding to 1%, 5%, and 10% levels
PP. Momtaz, IM. Parra
Is sustainable entrepreneurship profitable? ESG disclosure and the financial performance of SMEs 1557

cial performance, suggest that these enterprises pos- organizations responsible for issuing ISO certifications
sess sufficient economic incentives to capitalize on frequently provide resources and guidance specifically
the sustainable entrepreneurial opportunities present in to help companies comply with these standards. This
the market. Thus, these results highlight the role of support is particularly beneficial for small businesses
SMEs as change agents in driving sustainable develop- with limited resources and restricted access to large
ment, following the Schumpeterian logic for sustain- consulting firms. As a result, there has been a notable
able entrepreneurship (Schumpeter, 1942). increase in the number of certified companies.
In the same vein, the fact that sustainable SMEs Although ISO standards are not mandatory, some
appear to outperform non-sustainable ones may be industries adopt them to meet consumer demands,
explained by their capacity to offer additional util- improve their reputation, or establish international con-
ity to their stakeholders, this is, a non-economic util- tracts. Many companies have decided to obtain this cer-
ity arising from their commitment to ESG (Vismara, tification to demonstrate their social and environmental
2019). These results align with the delegated philan- commitment to their stakeholders. This confirms what
thropy theory reasoning (Bénabou & Tirole, 2010). is established by institutional theory, as it shows that
Furthermore, this positive result may come from SMEs institutional pressures lead companies to adopt social
voluntarily embracing their role as agents of sustain- demands to protect their legitimacy (Scott, 2005). In
able change, delegated by stakeholders, since the adop- this case, the Paris Agreement and ISO standards serve
tion of more socially and environmentally responsible as drivers for SMEs to meet stakeholder demands for
behaviors improves their reputation and, consequently, more sustainable practices (Berrone et al., 2013).
increases revenues (Pástor et al., 2022). Additionally, it We also find that sustainability orientation reduces
is plausible that this financial premium obtained by sus- SMEs’ performance variability, thus reducing their risk
tainable SMEs derives from their potential transaction of failure (Garrido-Ruso et al., 2024). Moreover, these
cost advantage in accessing soft information and tacit companies benefit more from their ESG disclosure
knowledge for their operations and strategy. SMEs typ- efforts when their financial situation is unfavorable, this
ically maintain more direct and personal contact with is, when their risk is higher (Kim et al., 2021). These
stakeholders, potentially leading to greater social, eco- results suggests that investing in ESG activities works
nomic, and environmental impact compared to larger as a form of insurance policy (Koh et al., 2014; Minor
companies (Acharya et al., 2013; Kim et al., 2019; & Morgan, 2011; Peloza, 2006).
Santos-Jaén et al., 2021). This ESG-as-insurance hypothesis is an extension
Our results reveal a substitution effect between ESG of moral capital theory, according to which corporate
signaling and ESG certification, being almost equally investments in ESG activities in times of prosperity
important sources of information about sustainabil- build moral capital. In turn, this moral capital helps
ity practices of our Spanish sample SMEs. However, mitigate reputational damage and value loss for share-
the Paris Agreement eliminated this effect, amplify- holders in the face of value-destroying events (Godfrey,
ing only the positive relationship between exogenous 2005). In our study, the value-destroying event is rep-
ESG certification and financial performance. As a plau- resented by the volatility of net income, reflecting the
sibly explanation, after the Paris Agreement, skepti- risk of failure for SMEs.
cism regarding the informational validity of internal The findings of the present study have several prac-
sources has increased, given broad awareness of the risk tical implications. SMEs make up 99.9% of Span-
of greenwashing, which reinforces the informational ish companies (European Commission, 2023a). Given
value of external certifications, such as ISO standards their economic significance and local-level impact,
(Connelly et al., 2011). Consequently, for an ESG- SMEs are seen by institutions and scholars as pivotal
oriented company to outperform its non-ESG-oriented to achieving a more sustainable future by fostering sus-
counterpart, it must demonstrate credible commitments tainable entrepreneurship. However, studies exploring
to comply with international standards. the relationship between ESG disclosure and firm per-
The disappearance of the substitution effect can be formance in a longitudinal sample of SMEs are limited
explained, first, by the updates made to ISO standards (Ortiz-Martínez et al., 2023), and thus this paper is one
to align with the requirements of the Paris Agreement, of the first. This scarcity primarily stems from the lack
including the creation of new certifications. Second, of mandatory disclosure for unlisted companies such as

123
1558 PP. Momtaz, IM. Parra

those found in our sample, resulting in minimal sustain- in SMEs, while ignoring the precise type of dis-
ability reports provided by companies. Resource con- closed information. The extent to which the individ-
straints compared to large companies make this disclo- ual E, S, and G dimensions of ESG matter for SME
sure more challenging for SMEs. Through this paper, performance is underexplored in the sustainable
we aim to assists scholars and policymakers in better entrepreneurship literature (Mansouri & Momtaz,
understanding ESG disclosure practices, with the goal 2022). However, an even more granular approach
of promoting their widespread adoption. may help unveil contingency aspects of sustain-
able entrepreneurship (e.g., E is composed of many
5.3 Limitations and avenues for future research grand challenges itself, such as climate change, air
and water pollution, solar energy and other renew-
Our study is a first step toward understanding the role of able energies, and carbon footprints of new and old
sustainability orientation in firm performance among technologies).
SMEs. Given the vast and growing interest in sus- 3. Organizing ESG initiatives. While our study shows
tainable entrepreneurship, as evidenced by the large that sustainability orientation may help increase
number of recent reviews (for a recent overview, see firm performance in SMEs, a limitation of our
Anand et al., 2021, chapter 2.1), and the necessarily paper is its omission of strategies for organizing
high level of abstraction in our analysis, it seems very to optimize sustainability-related value creation in
likely that a vivid literature on the financial and non- SMEs. Parrish (2010) discusses how organizational
financial aspects of sustainability-oriented venturing is design in sustainable entrepreneurship might be
about to emerge.8 Some avenues for potentially fruitful fundamentally different from that in conventional
research are as follows: entrepreneurship, employing an inductive approach
1. ESG returns. Our study estimates the financial per- based on 32 qualitative interviews. Nevertheless,
formance associated with sustainability orientation the research on concrete, practically implementable
for SMEs; however, our focus on financial per- SME structures conducive to sustainability orien-
formance leaves a number of open questions. For tation and sustainability-related value creation in
example, relative to financial performance, how SMEs remains very limited.
important are actual sustainability outcomes for
financial performance and for the future commu- 5.4 Conclusion
nicated sustainability orientation of the firm? Of
This study sheds light on the role of SMEs’ sustain-
course, as Anand et al. (2021, p. 12) correctly
ability orientation for firm performance. Specifically,
observe, “how to measure sustainability” presents
we examine the role of ESG-related information dis-
“major challenges.” This is owing partly to the sub-
closure in a longitudinal sample of Spanish SMEs over
jectivity of many ESG rents (e.g., normative dimen-
the period 2012–2022. Our results suggest that ESG
sions of ESG, such as relative economic equality),
is positively related to SMEs’ performance, that this
partly to the longevity of many ESG goals (e.g.,
positive relation is amplified by institutional pressures,
climate change), and partly to the difficulty asso-
and that sustainability may protect SMEs against fail-
ciated with quantifying ESG rents. Our view is
ure, supporting the “doing well by doing good” view in
that case studies hold perhaps the greatest promise
the SME context. Our study contributes, inter alia, to
for understanding cause-and-effect in sustainable
the emerging literature on sustainable entrepreneurship
entrepreneurship.
(e.g., Anand et al., 2021), and spearheads the emerg-
2. Disaggregating ESG. Similarly, our study’s app-
ing literature on how ESG affects the financial perfor-
roach has been to quantify the effect of ESG-
mance of SMEs, suggesting several promising avenues
related information disclosure on firm performance
for future research.
8 Our study shares some common limitations with Mansouri and
Momtaz (2022), and some avenues for future research are partly Acknowledgements The authors extend their thanks to the edi-
adapted from Mansouri and Momtaz (2022). tor, the two anonymous referees, and the participants of the 8th

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Is sustainable entrepreneurship profitable? ESG disclosure and the financial performance of SMEs 1559

Entrepreneurial Finance (ENTFIN) Conference for their helpful to site. Environmental Practice, 14(1), 17–25. [Link]
comments. org/10.1017/S1466046611000469
Anand, A., Argade, P., Barkemeyer, R., & Salignac, F.
Author contributions Authors contributed in equal parts. (2021). Trends and patterns in sustainable entrepreneurship
research: A bibliometric review and research agenda. Jour-
Funding Information Open Access funding enabled and orga- nal of Business Venturing, 36(3), 106092. [Link]
nized by Projekt DEAL. Isabel Parra acknowledges finan- 10.1016/[Link].2021.106092
cial support from the Spanish Ministry of Science, Innovation Ardia, D., Bluteau, K., Boudt, K., & Inghelbrecht, K. (2023).
and Universities (grants PID2020-118064GB-I00 and PID2023- Climate change concerns and the performance of green vs.
149010NB-I00) and the Madrid Regional Government (grant brown stocks. Management Science, 69, 7607–7632. https://
PHS-2024/PH-HUM-294), as well as from the Professorship [Link]/10.1287/mnsc.2022.4636
Excellence Program, under the multi-year agreement between Barney, J. (1991). Firm resources and sustained competitive
the Government of Madrid and the Autonomous University of advantage. Journal of Management, 17(1), 99–120. https://
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Data Availability Statement No datasets were generated or for instrumental variables/generalized method of moments
analyzed during the current study. estimation and testing. Stata Journal, 7(4), 465–506. https://
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Conflict of interest The authors declare no competing interests.
Ben-Amar, W., Chang, M., & McIlkenny, P. (2017). Board gen-
der diversity and corporate response to sustainability initia-
Open Access This article is licensed under a Creative Com-
tives: Evidence from the carbon disclosure project. Journal
mons Attribution 4.0 International License, which permits use,
of Business Ethics, 142, 369–383. [Link]
sharing, adaptation, distribution and reproduction in any medium
s10551-015-2759-1
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mons licence, and indicate if changes were made. The images or
tives: Evidence from the carbon disclosure project. Journal
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Berrone, P., Fosfuri, A., Gelabert, L., & Gomez-Mejia, L. R.
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statutory regulation or exceeds the permitted use, you will need
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Management Journal, 34(8), 891–909. [Link]
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1002/smj.2041
by/4.0/.
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