A Knowledge-Based Framework for ESG Adoption in SMEs: The Roles of Stakeholder Engagement and Market Dynamism

Abstract

Small and medium enterprises (SMEs) often face pressure to adopt sustainability-oriented practices aligned with Environmental, Social, and Governance (ESG) expectations. Their limited financial and managerial resources restrict the effective implementation of ESG practices. This study proposes a conceptual framework to explain how SMEs convert stakeholder relationships into sustainability-oriented practices through knowledge-related. Building on insights from the knowledge-based view and stakeholder theory, the study proposes that stakeholder engagement enables firms to access sustainability-related knowledge from external actors. This interaction facilitates knowledge acquisition, which supports the development of absorptive capacity, leading to better firm-level ESG practices. The framework further proposes that market dynamism moderates the relationship between knowledge acquisition and absorptive capacity, such that the conversion of acquired knowledge into organizational capabilities becomes stronger in dynamic market environments. By linking stakeholder engagement with knowledge-based mechanisms, this study contributes to the growing literature on sustainability in SMEs. It also explains how SMEs can use stakeholder relationships to develop ESG-oriented practices.