The Mediating Role of Good Corporate Governance in the Relationship between ESG Performance and Financial Sustainability among MSMEs in Medan, Indonesia

Abstract

This study examines the relationship between ESG Performance and Financial Sustainability among Micro, Small, and Medium Enterprises (MSMEs) by investigating the mediating role of Good Corporate Governance (GCG). While previous studies have predominantly examined the direct effects of ESG practices on organizational performance in large corporations, evidence on how governance mechanisms transmit ESG effects to financial sustainability among MSMEs in developing economies remains limited. This study addresses this gap by testing an ESG–GCG–Financial Sustainability framework among MSMEs in Medan, Indonesia. A quantitative cross-sectional design was employed using purposive sampling. Data were collected from 60 MSME owners and managers through a structured questionnaire using a five-point Likert scale and analyzed using Partial Least Squares Structural Equation Modeling (PLS-SEM). The results show that ESG Performance has a positive and significant effect on GCG (β = 0.864, p < 0.001), while GCG positively and significantly affects Financial Sustainability (β = 0.953, p < 0.001). GCG also significantly mediates the relationship between ESG Performance and Financial Sustainability (β = 0.823, p < 0.001), indicating that governance mechanisms play an important role in translating ESG practices into sustainable financial outcomes. This study contributes empirical evidence from MSMEs in an emerging economy and highlights governance as a mechanism linking ESG practices with financial sustainability. The findings provide implications for MSME owners and policymakers seeking to strengthen sustainable business development through improved governance practices. The results should be interpreted cautiously due to the relatively small sample and single-city context.