BRIDGING THE SUSTAINABILITY GAP, THE ROLE OF GREEN FINANCE IN MALAYSIAN SMES

Abstract

Small and medium-sized enterprises (SMEs) face significant challenges in integrating sustainability into their business operations, particularly due to resource constraints, a lack of knowledge, and weak inter-institutional coordination. To address these challenges, this conceptual paper proposes an integrated theoretical framework explaining the role of green finance in supporting the SME transition toward more sustainable business models. The study suggests that the role of green finance extends beyond the mere provision of financial resources; it has the potential to act as a catalyst for building organizational strategic capabilities. Grounded in a combination of Institutional Theory and the Natural-Resource-Based View (NRBV), the framework illustrates how external institutional pressures and demands can drive SMEs to adopt green finance. Meanwhile, internal organizational capabilities influence the effectiveness of utilizing these resources to generate green innovations, strengthen environmental, social, and governance (ESG) practices, and build sustainable competitive advantages. From a theoretical perspective, this framework expands the discourse on sustainable finance by integrating macro-level institutional environmental influences with micro-level organizational capabilities and resource management. Practically, the proposed framework can assist policymakers in developing green finance instruments and mechanisms that are better aligned with SME needs. More importantly, it can guide SME owners and managers in leveraging access to green financing to develop strategic capabilities and achieve long-term competitiveness.