A Conceptual Framework of Governance Diversity and ESG Adoption in SMEs: Evidence from Emerging Economies

Abstract

This study develops a conceptual framework to explain environmental, social, and governance (ESG) adoption in small and medium-sized enterprises (SMEs) within emerging economies. Despite the growing importance of ESG practices in enhancing sustainability and competitiveness, existing literature has predominantly focused on large corporations, leaving SMEs underexplored. Addressing this gap, the study introduces governance diversity as a critical driver of ESG adoption and proposes a multidimensional Governance Diversity Index (GDI) that captures board heterogeneity in terms of gender, expertise, independence, and demographic characteristics. Drawing on stakeholder theory, the resource-based view (RBV), and institutional theory, the paper argues that governance diversity enhances stakeholder responsiveness and organizational decision-making, thereby facilitating ESG adoption. Furthermore, the study incorporates strategic agility as a mediating mechanism, suggesting that SMEs with diverse governance structures are better positioned to sense and respond to environmental changes, enabling the integration of sustainability practices into their operations. Institutional pressure is also introduced as a moderating factor, highlighting the role of regulatory frameworks, stakeholder expectations, and market forces in shaping ESG adoption. The proposed framework offers a comprehensive and context-sensitive understanding of how internal governance mechanisms and external environmental factors interact to influence sustainability practices in SMEs. This study contributes to the literature by extending ESG research to SMEs, introducing a novel multidimensional governance construct, and integrating multiple theoretical perspectives into a unified framework. The findings provide important implications for policymakers, SME practitioners, and regulators seeking to promote sustainable business practices in emerging economies. Future research is encouraged to empirically test the proposed framework across different contexts and industries.