Sustainable Business Through Innovation: Examining the Mediating Effect of Green Process Innovation on the Link Between Financial Resources, ESG Risk Rating, and Environmental Performance

Abstract

This study aims to examine the mediating role of green process innovation in the relationship between financial resources, ESG risk ratings, and environmental performance among Indonesian manufacturing firms. Employing a quantitative approach with partial least squares structural equation modeling (PLS‐SEM), the analysis is based on data from 125 publicly listed manufacturing firms on the Indonesia Stock Exchange during the 2019–2022 period. The results reveal that financial resources positively influence both green process innovation and environmental performance, whereas ESG risk ratings exert a negative impact on both. Green process innovation significantly mediates the effects of financial resources and ESG risk on environmental performance. These findings underscore the strategic importance of process‐level innovation as a conduit through which internal resources and external stakeholder pressures can be transformed into improved environmental outcomes. Theoretically, this study extends the resource‐based view, stakeholder theory, and the do no significant harm (DNSH) principle by showing that green process innovation is a strategic mechanism that transforms internal resources into better environmental performance and offers practical implications for promoting sustainable industrial transformation in emerging economies.