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

Abstract

good corporate governance; ESG performance; financial sustainability; MSMEs.

Introduction

Striving toward socio-ecological balance has become a dominant global agenda for governments, businesses, and society as organizations face increasing environmental challenges, technological disruption, and changing stakeholder expectations. Business success is no longer assessed solely through financial achievements; instead, greater attention is directed toward how firms manage their environmental impacts, social responsibilities, and internal governance practices. Consequently, the Environmental,

Social, and Governance (ESG) framework has emerged as an important managerial framework that influences organizational legitimacy, investment attractiveness, and

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. Wahyuni et al.

10.61194/ijtc.v7i4.2557 long-iterm competitiveness (Eccles & Klimenko, 2023;

Luo et al., 2024). The growing emphasis on ESG is evident in the expansion of sustainability reporting initiatives, responsible investment practices, and regulatory frameworks adopted across many countries. These developments indicate the incorporation of long-term viability dimensions into high- level business blueprints and day-to-day choices. As a result, organizations are increasingly expected to balance economic objectives with social responsibility and environmental stewardship while maintaining business performance and stakeholder confidence (Bindeeba et al., 2025; Chen & Wang, 2024).

In Indonesia, Micro, Small, and Medium Enterprises (MSMEs) constitute the backbone of the national economy.

According to the Ministry of Cooperatives and SMEs, MSMEs account for more than 60% of Indonesia’s Gross Domestic

Product and absorb approximately 97% of the national workforce, representing more than 65 million business units nationwide. Their contribution extends beyond employment creation and income generation to supporting regional development and strengthening economic resilience. Within this context, Medan City represents one of the largest economic centers outside Java, characterized by a substantial concentration of trade, service, manufacturing, and culinary

MSMEs. The economic significance of Medan makes it an appropriate setting for examining sustainability-oriented business practices and governance mechanisms among

MSMEs operating in an emerging-market environment (Organisation for Economic Co-operation & Development, 2023).

An important issue facing MSMEs today concerns their ability to achieve financial sustainability. Financial sustainability reflects the capacity of a business to maintain stable financial performance, adapt to environmental and market changes, and preserve its operational continuity over time. For smaller enterprises, sustainable financial conditions are essential because limited resources often make them more vulnerable to economic uncertainty and competitive pressures. Therefore, identifying factors that strengthen long- term financial resilience has become increasingly relevant for both researchers and policymakers (Mahanta et al., 2024;

Momtaz & Parra, 2025).

Recent literature suggests that ESG Performance may contribute to sustainable business performance by improving operational efficiency, strengthening stakeholder relationships, and enhancing organizational reputation. Enterprises that actively integrate environmental responsibility, social commitment, and sound governance practices are often better positioned to create long-term value and sustain competitive advantages. Nevertheless, the adoption of ESG principles among MSMEs remains uneven, particularly in developing economies where firms frequently encounter resource limitations, knowledge constraints, and managerial challenges (Abbas, Tufail, Latif, Iftikhar, et al.,

2026; Agyabeng-mensah et al., 2020; Ali et al., 2026; Chen &

Wang, 2024; Danish et al., 2025; Hwang et al., 2026; Luo et al., 2024).

Although previous studies have reported positive associations between ESG practices and organizational performance, several important gaps remain unresolved.

First, existing research has predominantly examined direct relationships between ESG Performance and financial or market outcomes in large corporations and publicly listed firms (Luo et al., 2024; Momtaz & Parra, 2025). Limited attention has been given to the governance transmission mechanism through which ESG Performance influences

Financial Sustainability in MSMEs. Second, from a theoretical perspective, prior studies have rarely integrated Stakeholder

Theory and Agency Theory simultaneously to explain how governance mechanisms translate sustainability initiatives into financial outcomes. Third, methodological limitations persist because many ESG studies rely on large-firm disclosure data, whereas MSMEs often operate with informal governance arrangements, limited disclosure practices, and resource constraints that require different measurement approaches (Khotimah et al., 2024; Ndoka et al., 2025). Finally, the Indonesian institutional context is characterized by heterogeneous governance quality, varying regulatory enforcement, and strong owner-manager dominance, creating sustainability and governance dynamics that may differ from those observed in developed economies. Consequently, evidence regarding the ESG–GCG–Financial Sustainability mechanism among Indonesian MSMEs remains limited. (Ranjan et al., 2026; Shari et al., 2026).

This study offers a more specific contribution than prior

MSME sustainability research. Unlike previous studies that focused mainly on direct ESG–performance relationships or governance as an independent variable, the present study investigates Good Corporate Governance as a mediating mechanism linking ESG Performance and Financial

Sustainability among MSMEs in Medan, Indonesia. The study further contributes by employing a PLS-SEM approach that is suitable for MSME survey data and by operationalizing governance through transparency, accountability, responsibility, independence, and fairness dimensions.

Theoretically, GCG is positioned as a necessary governance capability that enables sustainability-oriented practices to be translated into accountable managerial actions and financially sustainable business outcomes.

Based on the preceding arguments, this study aims (1) to examine the effect of ESG Performance on Good Corporate

Governance, (2) to examine the effect of Good Corporate

Governance on Financial Sustainability, (3) to examine the direct effect of ESG Performance on Financial Sustainability, and (4) to test the mediating role of Good Corporate

Governance in the relationship between ESG Performance and

Financial Sustainability among MSMEs in Medan, Indonesia.

Although ESG Performance includes a governance dimension, the governance component in ESG Performance in this study refers to sustainability-oriented governance practices associated with ESG Performance, such as ethical conduct, stakeholder responsibility, and sustainability-related managerial commitments. In contrast, Good Corporate Governance (GCG) is conceptualized as a broader organizational governance system encompassing transparency, accountability, responsibility, independence, and fairness. Accordingly, ESG governance represents sustainability-oriented governance behavior, whereas GCG reflects the overall quality of organizational governance structures and processes. This distinction is intended to minimize conceptual overlap and improve construct discrimination.

Accordingly, the proposed conceptual framework positions

ESG Performance as the antecedent variable, Good Corporate

Governance as both an endogenous and mediating variable, and Financial Sustainability as the outcome variable.

Table 9. Direct Effects Results

ESG Performance and Good Corporate Governance

Stakeholder Theory suggests that organizations adopting sustainability-oriented practices are encouraged to strengthen governance mechanisms in order to maintain legitimacy, stakeholder trust, and organizational accountability (Freeman et al., 2020). Nevertheless, ESG adoption may not always improve governance quality because some firms may implement sustainability practices symbolically without substantial governance reform, particularly in resource- constrained MSMEs. Given the expectation that substantive

ESG practices are associated with stronger governance practices, the following hypothesis is proposed: (Khlifi et al.,

2026; Shari et al., 2026) Wahyuni et al.

10.61194/ijtc.v7i4.2557

H1: ESG Performance positively affects Good Corporate Governance.

Good Corporate Governance and Financial Sustainability

Agency Theory argues that effective governance mechanisms improve monitoring, reduce information asymmetry, and enhance resource allocation efficiency, thereby supporting long-term financial sustainability (Jensen & Meckling, 1976). However, governance mechanisms may also impose administrative and compliance costs that could reduce short-term financial performance in small enterprises.

Because sound governance is expected to enhance financial discipline and organizational resilience over time, the following hypothesis is proposed: (Ardiansyah et al., 2025;

Jahja et al., 2026; Pilla et al., 2026; Zarefar et al., 2026).

H2: Good Corporate Governance positively affects Financial Sustainability.

ESG Performance and Financial Sustainability

ESG-oriented practices may enhance operational efficiency, stakeholder relationships, organizational reputation, and long-term business resilience, thereby strengthening Financial Sustainability. Based on this argument, the following direct relationship is proposed: (Agyabeng-mensah et al., 2020; Ali, 2025; Oluwagbade et al., 2026).

H3: ESG Performance positively affects Financial Sustainability.

The Mediating Role of Good Corporate Governance

Governance mechanisms are expected to translate ESG- oriented practices into accountable managerial processes, financial discipline, and sustainable business outcomes.

Therefore, Good Corporate Governance is expected to mediate the relationship between ESG Performance and

Financial Sustainability. (Ben Salah & Kammoun, 2026); (Gezgin et al., 2024).

H4: Good Corporate Governance mediates the relationship between ESG Performance and Financial Sustainability.

Methods

This study employed a quantitative explanatory research design to examine the relationships among ESG Performance, Good Corporate Governance (GCG), and Financial

Sustainability of Micro, Small, and Medium Enterprises (MSMEs). A cross-sectional survey approach was used, in which data were collected at a single point in time from MSME owners and managers. Accordingly, the analysis was intended to explain statistical associations and mediation relationships among constructs rather than to establish definitive causal effects.

The research was conducted in Medan City, Indonesia, which represents one of the largest economic centers outside

Java Island. The city was selected because of its substantial

MSME population and its strategic contribution to regional economic development. Focusing on MSMEs in this setting provides an opportunity to examine how sustainability- oriented practices and governance mechanisms are associated with business continuity in a developing-market environment.

The target population consisted of MSME owners and business managers operating in Medan. Respondents were selected through purposive sampling because the study required individuals with adequate knowledge of sustainability practices, governance implementation, and business financial conditions. The inclusion criteria were: (1) the business was classified as a micro, small, or medium enterprise according to Indonesian MSME criteria; (2) the business had operated for at least two years; (3) the respondent was the owner, founder, manager, or individual directly responsible for managerial and financial decision making; and (4) the business was actively operating during the data collection period. Businesses that had operated for less than two years or respondents without managerial authority were excluded from the study.

A total of 75 questionnaires were distributed to eligible MSMEs.

Of these, 64 questionnaires were returned, and 60 questionnaires were complete and suitable for analysis, resulting in a usable response rate of 80.0%. The respondents were recruited from the accessible MSME population registered in local MSME community networks, business associations, entrepreneurship training participants, and

MSME assistance programs coordinated through district-level business development activities in Medan City. Purposive selection was applied to MSMEs that met the inclusion criteria and were accessible during the data collection period. Table 1 presents the profile of the participating MSMEs.

The adequacy of the sample size was evaluated using the

10-times rule in PLS-SEM. The most complex endogenous construct in the proposed model received two incoming structural paths, resulting in a minimum sample requirement of Wahyuni et al.

10.61194/ijtc.v7i4.2557

20 observations. In addition, an a priori power assessment using conventional assumptions (α = 0.05, power = 0.80, two predictors, medium effect size f² = 0.15) indicates a minimum sample of approximately 55 respondents. Therefore, the final sample of 60 respondents exceeded both the minimum PLS-

SEM requirement and the minimum sample required for detecting medium-sized effects. Nevertheless, the relatively small sample drawn from a single city may limit external generalizability and increase the risk of model overfitting; consequently, the findings should be interpreted cautiously.

Table 1. Profile of Participating MSMEs (n = 60)

Data Collection Procedure

Data were collected through a structured questionnaire administered directly to respondents. The instrument consisted of closed-ended statements measured using a five- point Likert scale, ranging from 1 = strongly disagree to 5 = strongly agree. The questionnaire items were adapted from established literature on ESG Performance, Good Corporate

Governance, and Financial Sustainability and were modified to reflect the characteristics of MSMEs. (De Silva et al., 2025).

The questionnaire was prepared in English, translated into

Indonesian, and reviewed by two academics in accounting and management to ensure semantic equivalence and content validity. A pilot test involving 15

MSME owners was conducted before the main survey to evaluate item clarity, wording, and completion time. Minor revisions were made based on respondent feedback, and pilot responses were excluded from the final analysis.

Participation was voluntary, respondents were informed about the purpose of the study, confidentiality was assured, and informed consent was obtained before questionnaire administration.

ESG Performance, Good Corporate Governance, and

Financial Sustainability were specified as reflective constructs because their indicators were conceptualized as manifestations of the underlying latent variables and were expected to covary. The reflective specification supports the use of PLS-SEM for estimating measurement and structural relationships in the proposed model.

Common Method Bias

Because all variables were measured using self-reported questionnaires from a single respondent in each firm, potential common method bias was assessed using full collinearity variance inflation factors (VIFs). As shown in Table 7, all VIF values were below the recommended threshold of

3.3, indicating that common method bias was unlikely to threaten the validity of the findings.

Data Analysis Method

The proposed research framework was analyzed using a variance-based structural equation modeling approach implemented in SmartPLS software. This technique was selected because of its capability to estimate complex structural relationships, assess mediation effects, and generate reliable predictive estimates even when sample sizes are relatively modest. Furthermore, PLS-SEM is widely recognized as an appropriate analytical methodology for examining hypothesized relationships among latent constructs, prediction-oriented analysis, and model development in studies using cross-sectional survey data. (Ji et al., 2026). The analytical process was divided into two interconnected steps: evaluating the construct indicators (outer model) followed by examining the hypothesized structural relationships among constructs (inner model).

Measurement Model Evaluation

The primary objective of verifying the outer configuration was to certify that each questionnaire item truly mirrored its designated hidden variable. The evaluation focused on validity and reliability requirements commonly recommended in

PLS-SEM studies.

Convergent Validity

• Indicator loading coefficients should exceed 0.70.

• Average Variance Extracted (AVE) should be higher than 0.50.

Discriminant Validity

• Evaluation based on the Fornell–Larcker criterion.

• Examination of the Heterotrait–Monotrait Ratio (HTMT).

Internal Consistency Reliability

• Cronbach's Alpha should be greater than 0.70.

• Composite Reliability should exceed 0.70.

These assessment procedures were performed to confirm that each measurement item appropriately reflected the intended construct and exhibited satisfactory consistency.

Structural Relationship Evaluation

Once the validity profiles of the variables were established, the analysis proceeded to the evaluation of the structural relationships in order to assess the explanatory and predictive capability of the proposed framework. Several indicators were employed to evaluate model performance, including: 1.

Coefficient of Determination (R²)

2.

Table 8. R-Square and Adjusted R-square

Effect Size (f²)

3. Predictive Relevance (Q²)

4. Path Coefficients

5. Bootstrapping Analysis

Table 11. Effect Size (f²)

Hypothesis Testing

was conducted using a significance level of 5 percent. A proposed relationship was considered statistically supported when the bootstrapping output generated a t-statistic exceeding 1.96 and a probability value lower than 0.05. In addition,

Mediation Analysis

was undertaken to examine whether Good Corporate Governance functioned as an intervening construct in the relationship between ESG

Performance and Financial Sustainability. Evidence of a statistically significant

Indirect Effect

indicates that governance quality acts as a transmission channel through which ESG- related practices contribute to sustainable financial outcomes among MSMEs.

Table 10. Indirect Effect Results

Result and Discussion

Measurement Model Assessment

Convergent Validity

The adequacy of indicator convergence was examined through the outer loading coefficients generated by the PLS algorithm. Following commonly accepted SEM-PLS guidelines, indicators are considered to exhibit satisfactory convergent validity when loading coefficients surpass the universally standard cutoff value of 0.70 (Hair et al., 2022).

The results displayed in Table 2 reveal that all observed indicators achieved loading coefficients above the recommended benchmark, with values ranging between 0.741 and 0.923. These values indicate that each indicator contributes strongly to the measurement of its intended construct. Consequently, the observed variables demonstrate a satisfactory level of association with their corresponding latent variables.

Following the initial validity assessment, indicators showing substantial conceptual and empirical overlap were reviewed, and the measurement model was refined before the discriminant validity assessment was finalized. This refinement was conducted to improve construct distinctiveness and to ensure that each indicator represented its intended latent construct more clearly. Wahyuni et al.

10.61194/ijtc.v7i4.2557

The findings further indicate that all retained indicators satisfied the recommended outer-loading criteria and demonstrated sufficient explanatory power in representing their respective latent constructs after the measurement model refinement (Table 3).

Discriminant Validity

Discriminant validity was reassessed after reviewing the conceptual definitions and empirical overlap among the indicators of ESG Performance, Good Corporate Governance, and Financial Sustainability, as presented in Table 4. The measurement model was refined through indicator evaluation and construct re-specification, and the model was subsequently re-estimated using SmartPLS.

Discriminant validity was further examined using the

Heterotrait–Monotrait Ratio (HTMT). All HTMT values were below the recommended threshold of 0.90, confirming that the constructs were empirically distinct.

The revised Fornell–Larcker results show that the square root of the AVE for each construct exceeded its correlations with the other constructs, indicating adequate discriminant validity. Discriminant validity was further examined using the

Heterotrait–Monotrait Ratio (HTMT), presented in Table 5 and all HTMT values were below the recommended threshold of 0.90. These findings confirm that ESG Performance, Good

Corporate Governance, and Financial Sustainability are empirically distinct constructs after the measurement model refinement. Therefore, the subsequent structural analysis was interpreted based on a measurement model that demonstrated acceptable construct distinctiveness.

Table 3. Outer Loading Results

Reliability Assessment

Internal consistency reliability was evaluated through

Cronbach’s Alpha and Composite Reliability (CR), while AVE values were reported as supporting evidence of convergent validity.

The statistical results demonstrate that all latent variables satisfy the recommended reliability standards. Cronbach’s

Alpha coefficients exceeded the minimum acceptable level of 0.70, indicating satisfactory internal consistency among the indicators. Similarly, Composite Reliability values were above the recommended threshold, confirming the stability and consistency of the measurement scales, as shown in Table 6.

Furthermore, AVE values exceeded 0.50 for all constructs, indicating that each latent variable explained more than half of the variance of its indicators. Taken together, these findings confirm the adequacy of the measurement model in terms of reliability and convergent validity. All reliability statistics remained above the recommended thresholds after the measurement model refinement, indicating that the refinement process did not reduce the internal consistency of the constructs.

Common Method Bias and Collinearity Diagnostics

Because all variables were measured using self-reported questionnaires from a single respondent in each firm, common method bias was assessed using full collinearity variance inflation factors (VIFs).

All VIF values were below the recommended threshold of

3.3, indicating that common method bias was unlikely to pose a serious threat to the validity of the findings. Inner VIF values were also below 5.0, suggesting that severe multicollinearity was not present in the structural model.

Table 7. Full Collinearity VIF

Structural Model Assessment

The statistical pathways connecting each latent construct within this conceptual framework are visually mapped out in

Figure 1. In order to verify the hypotheses and measure how well the model accounts for the variations in the variables, a comprehensive inner model assessment was executed.

The structural relationships were evaluated only after the refined measurement model demonstrated acceptable convergent validity, reliability, and discriminant validity.

Coefficient of Determination (R²)

The predictive capability of the structural framework was assessed using the coefficient of determination (R²). Based on the structural evaluation presented in Table 8, Good Corporate

Governance yielded an R² score of 0.747. This metric implies that around 74.7% of the fluctuations observed coefficient observed in this study should again be interpreted cautiously. The overlap between governance and financial sustainability indicators may partially explain the strength of the relationship. MSME owners may perceive financially sustainable businesses as businesses that are also well governed, which can inflate the observed association in self-reported survey data.

ESG Performance and Financial Sustainability

The empirical results indicate that ESG Performance has a positive and significant association with Financial Sustainability among MSMEs in Medan. This finding suggests that enterprises adopting sustainability-oriented practices tend to demonstrate stronger financial resilience, greater operational continuity, and better capacity to adapt to market and environmental changes. Environmental responsibility, social engagement, and ethical managerial practices may contribute to more efficient resource utilization, stronger customer relationships, and enhanced business reputation, which collectively support long-term financial sustainability.

This finding is consistent with Stakeholder Theory, which argues that organizations creating value for a broader range of stakeholders are more likely to obtain continued support, legitimacy, and access to resources necessary for sustainable performance (Freeman et al., 2020). MSMEs that maintain responsible relationships with customers, employees, suppliers, and local communities may experience stronger

Table 11. Effect Size (f2) f2 ESG Performance → Good Corporate Governance 2.950

Good Corporate Governance → Financial Sustainability 9.823

ESG Performance → Financial Sustainability 0.081 Wahyuni et al.

10.61194/ijtc.v7i4.2557 stakeholder loyalty and reduced business uncertainty, thereby improving their financial sustainability.

The result also supports previous studies reporting positive relationships between ESG practices and long-term business performance, operational efficiency, and organizational resilience (Chen & Wang, 2024; Luo et al.,

2024; Momtaz & Parra, 2025). In the context of Medan

MSMEs, sustainability-oriented practices may strengthen customer trust and local market reputation, both of which are particularly important for small businesses operating in highly competitive and relationship-based markets. (Agyabeng- mensah et al., 2020; Ali, 2025; Oluwagbade et al., 2026).

Nevertheless, the positive relationship should be interpreted cautiously. The cross-sectional design of the study does not permit strong causal inference, and financially stronger MSMEs may also possess greater capacity to implement ESG-related activities. In addition, the use of self- reported measures may increase the possibility of common method bias and socially desirable responses, potentially strengthening the observed relationship.

The finding that ESG Performance remains significant even after Good Corporate Governance is included in the model indicates that governance does not fully explain the

ESG–Financial Sustainability relationship. Sustainability- oriented practices may influence financial outcomes through additional pathways, including cost efficiency, customer retention, innovation capability (Yun et al., 2026), employee commitment, and market differentiation. Consequently, ESG

Performance appears to function not only as a governance- related practice but also as a broader strategic capability that contributes directly to the financial sustainability of MSMEs.

The Mediating Role of Good Corporate Governance

The mediation analysis demonstrates that Good

Corporate Governance functions as an important mechanism through which ESG Performance is associated with Financial

Sustainability. The results suggest that sustainability-oriented practices are more likely to contribute to financial sustainability when they are translated into managerial procedures, monitoring activities, accountability systems, and financial control practices. (Ben Salah et al., 2026; Fatma &

Chouaibi, 2024; Gezgin et al., 2024)

However, governance may not mediate this relationship under all circumstances. In MSMEs characterized by weak bookkeeping systems, limited managerial capability, minimal stakeholder monitoring, or highly informal business operations, ESG practices may remain symbolic and may not substantially influence governance quality or financial outcomes. The mediating role of governance is therefore likely to depend on the presence of minimum organizational capabilities and managerial commitment.

The partial mediation result also indicates that ESG

Performance retains a direct association with Financial

Sustainability after governance is included in the model. This finding suggests that sustainability-oriented practices may influence financial outcomes through additional mechanisms beyond governance, such as operational efficiency, customer loyalty, market reputation, and stakeholder support.

The structural model explained 74.7% of the variance in

Good Corporate Governance, leaving 25.3% unexplained. This remaining variance may be associated with factors not included in the model, including owner education, managerial competence, financial literacy, digital capability, business age, access to external finance, family ownership structure, and institutional support. Future studies should incorporate these variables to provide a more comprehensive explanation of governance quality among MSMEs. (Lubis et al., 2024;

Manurung & Ningsi, 2023; Ningsi & Hastalona, 2026).

From a theoretical perspective, the findings provide support for both Stakeholder Theory and Agency Theory. Stakeholder Theory explains how responsiveness to stakeholder expectations can encourage sustainability- oriented managerial behavior, whereas Agency Theory highlights the role of governance systems in aligning managerial actions with organizational objectives. The integration of these perspectives helps explain why governance strengthens the relationship between ESG Performance and

Financial Sustainability in the MSME context.

This study contributes to the sustainability and governance literature by extending ESG research to MSMEs in an emerging- economy setting and by demonstrating that governance acts as a significant transmission mechanism between ESG

Performance and Financial Sustainability. At the same time, the findings highlight the importance of methodological caution when interpreting very strong statistical relationships in studies using small samples and self-reported survey data. Accordingly, the findings should be interpreted as evidence of statistical association within the Medan MSME context rather than as definitive causal effects.

From a practical perspective, the findings suggest that

MSME owners may benefit from integrating governance development into sustainability initiatives. Strengthening transparency, accountability, financial monitoring, and decision-making procedures may increase the likelihood that sustainability-oriented practices contribute to long-term financial resilience. Policymakers and business support institutions may also consider governance capability development as an important complement to MSME sustainability programs. (De Silva et al., 2025; Ningsi &

Hastalona, 2026).

Conclusion

This study examined the relationships among ESG

Performance, Good Corporate Governance (GCG), and Financial

Sustainability within Micro, Small, and Medium Enterprises (MSMEs) in Medan City, Indonesia. The empirical results indicate that ESG Performance is positively associated with Good

Corporate Governance and Financial Sustainability, while Good

Corporate Governance is positively associated with Financial

Sustainability among the participating MSMEs.

The mediation analysis further indicates that Good Corporate

Governance partially mediates the relationship between ESG

Performance and Financial Sustainability within the observed

MSME sample. These findings suggest that sustainability- oriented business practices are associated with stronger governance arrangements and more favorable financial sustainability perceptions among the participating enterprises.

The findings should be interpreted as evidence of statistical associations within the Medan MSME context rather than as definitive causal relationships. The results are consistent with

Stakeholder Theory and Agency Theory, which propose that responsiveness to stakeholder expectations and governance alignment mechanisms are associated with sustainability- oriented managerial behavior and financial sustainability outcomes. However, the findings do not imply that similar relationships will necessarily be observed across all MSME contexts.

From a practical perspective, the results suggest that strengthening transparency, accountability, financial monitoring, and decision-making procedures may increase the likelihood that sustainability-oriented practices are associated with long- term financial resilience among the participating MSMEs.

Policymakers and MSME support institutions may also consider governance capability development as a complementary component of sustainability programs, particularly for owner- managed enterprises.

Several limitations should be acknowledged. First, the study was based on a relatively small sample of 60 MSMEs from a Wahyuni et al.

10.61194/ijtc.v7i4.2557 single city, which limits the external generalizability of the findings. Second, purposive sampling may have introduced selection bias because respondents were selected based on specific managerial characteristics. Third, all variables were measured using self-reported questionnaires, which may be affected by social desirability bias and common method variance. Fourth, the cross-sectional research design does not permit strong causal inference. The measurement model was refined to improve construct distinctiveness before the structural analysis was conducted; however, the relationships among the constructs remained relatively strong within the participating MSMEs.

Future research is encouraged to address these limitations by employing larger and multi-region MSME samples in order to improve external validity and examine whether the observed relationships differ across institutional and cultural contexts.

Longitudinal research designs are needed to evaluate whether changes in ESG practices are followed by changes in governance quality and financial sustainability over time. Future studies are also encouraged to incorporate objective financial indicators, multiple respondents within each firm, and more refined governance measurements to reduce self-report bias and strengthen construct validity. In addition, examining contextual factors such as managerial competence, financial literacy, digital capability, business age, access to external finance, and institutional support may help explain the remaining variance in governance quality and identify the conditions under which governance is more likely to mediate the relationship between

ESG Performance and Financial Sustainability.

References

Abbas, S. M., Tufail, M. S., Latif, M., & Iftikhar, Y. (2026). Driving sustainable performance : the role of corporate ethical and legal responsibility in fostering environmental and social performance. (September). https://doi.org/10.1108/SRJ-09-2025-0906

Abbas, S. M., Tufail, M. S., Latif, M., Iftikhar, Y., & Shahzad, A. (2026). Driving sustainable performance: the role of corporate ethical and legal responsibility in fostering environmental and social performance. Social Responsibility Journal. https://doi.org/10.1108/SRJ-09-20250906

Agyabeng-mensah, Y., Ahenkorah, E., & Afum, E. (2020). Green warehousing , logistics optimization , social values and ethics and economic performance : the role of supply chain sustainability. https://doi.org/10.1108/IJLM-10-2019-0275

Ali, S. I. (2025). Enhancing supply chain resilience and economic performance through Industry 4 . 0 and ESG integration : the mediating role of sustainable practices. 39(4), 1429–1463. https://doi.org/10.1108/JEIM-05-2025-0361

Ali, S. I., Surucu-Balci, E., & Balci, G. (2026). Enhancing supply chain resilience and economic performance through Industry 4.0 and ESG integration: the mediating role of sustainable practices. Journal of Enterprise Information Management, 39(4), 1429–1463. https://doi.org/10.1108/JEIM-05-2025-0361

Ardiansyah, M., Yulia, Y., Munandar, A., & Lestari, D. M. (2025). The role of Islamic corporate governance and quality of environmental disclosures in moderating the application of accounting conservatism to mitigate financial risks in Islamic banks. Journal of Islamic Accounting and Business Research. https://doi.org/10.1108/JIABR-01-2025-0038

Atif, M., Ali, S., Hossain, M., & Habib, A. (2025). ESG performance and corporate financial outcomes: Evidence from emerging market firms under heterogeneous governance conditions. Journal of International Accounting, Auditing and Taxation, 58, 100622. https://doi.org/10.1016/j.intaccaudtax.2025.100622

Ben Salah, I., & Kammoun, A. (2026). The mediating role of corporate governance in the relationship between blockchain technology and firm value: international evidence. Corporate Governance. https://doi.org/10.1108/CG-04-2025-0275

Ben Salah, Kammoun, & Aida. (2026). The mediating role of corporate governance in the relationship between blockchain technology and firm value : international evidence. (October 2025). https://doi.org/10.1108/CG-04-2025-0275 Bindeeba, D. S., Mugisa, A., Nakawesi, J. S., Senyimba, C., Mulebeke, R., &

Karamagi, Y. (2025). ESG implementation and corporate sustainability: Evidence from emerging markets. Sustainability, 7(1), 1–18.

Chen, D., & Wang, S. (2024). Digital transformation, innovation capabilities, and servitization as drivers of ESG performance in manufacturing SMEs. Scientific Reports, 14, 24516. https://doi.org/10.1038/s41598-02476416-8

Danish, R. Q., Ali, M., Baker, M., & Islam, R. (2025). In fl uence of corporate social responsibility , green practices and organizational politics on sustainable business performance : the importance of employee proenvironmental behavior. 21(1), 54–77. https://doi.org/10.1108/SRJ10-2023-0548

De Silva, Gunarathne, N., & Satish Kumar. (2025). Exploring the impact of digital knowledge , integration and performance on sustainable accounting , reporting and assurance. 33(2), 497–552. https://doi.org/10.1108/MEDAR-02-2024-2383

Demers, E., Hendrikse, J., Joos, P., & Lev, B. (2021). ESG did not immunize stocks during the COVID-19 crisis, but investments in intangible assets did. Journal of Business Finance & Accounting, 48(3–4), 433–462. https://doi.org/10.1111/jbfa.12523

Eccles, R. G., & Klimenko, S. (2023). The investor revolution. Harvard Business Review, 101(4), 106–116.

Fatma, H. Ben, & Chouaibi, J. (2024). The mediating role of corporate social responsibility in good corporate governance and fi rm value relationship : evidence from European fi nancial institutions. (September). https://doi.org/10.1108/MEDAR-08-2022-1762

Freeman, R. E., Phillips, R., & Sisodia, R. (2020). Tensions in stakeholder theory. Business and Society Review, 125(2), 213–231. https://doi.org/10.1111/basr.12200

Gezgin, T., Özer, G., Merter, A. K., & Balcıoğlu, Y. S. (2024). The mediating role of corporate governance in the relationship between net profit and equity and voluntary disclosure in the context of legitimacy theory. Sustainability, 16(10), 4097.

Hair, J. F., Hult, G. T. M., Ringle, C. M., & Sarstedt, M. (2022). A Primer on Partial Least Squares Structural Equation Modeling (PLS-SEM) (3rd ed.). Sage Publications. https://doi.org/10.1007/978-3-030-80519-7

Hwang, R., Lee, M., & Ahn, Y. (2026). From ESG to consumer trust and reputation in export contexts: evidence from Korean consumers evaluating exporting firms. Asia Pacific Journal of Marketing and Logistics. https://doi.org/10.1108/APJML-08-2025-1644

Jahja, N. J., Mohammed, N. F., & Lokman, N. (2026). Exploring good corporate governance and performance in Indonesian state-owned enterprises from a qualitative approach. Qualitative Research in Financial Markets. https://doi.org/10.1108/QRFM-09-2024-0269

Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X

Ji, R., Zhang, S., Dou, W., & Hao, Y. (2026). Greenwashing or brownwashing? The impact of fintech on corporate strategic ESG behaviour – evidence from listed companies in China. Sustainability Accounting, Management and Policy Journal. https://doi.org/10.1108/SAMPJ-07-2025-0992

Khlifi, S., Boujelbene, M. A., & Chouaibi, J. (2026). The e ff ect of economic , environmental and social sustainability performance on accounting conservatism : the moderating role of good corporate governance. (September). https://doi.org/10.1108/RAF-08-2023-0291

Khotimah, N., Pramono, S., & Wibowo, A. (2024). Good corporate governance and sustainability performance among SMEs in emerging economies. Corporate Governance and Sustainability Review, 8(1), 45–59.

Lubis, Etty, L., Ningsi, H., Manurung, L., & Widodo, S. (2024). Digital Financial Management of MSMEs : The Impact of Financial Literacy and Financial Technology. 7(2), 1164–1172.

Luo, X., Zhang, Y., & Li, H. (2024). Environmental, social, and governance performance and financial sustainability: A stakeholder perspective. Business Strategy and the Environment, 33(1), 215–231. https://doi.org/10.1002/bse.5410

Mahanta, A., Sahu, N. C., Behera, P. K., & Kumar, P. (2024). Variations in financial performance of firms with ESG integration in business: The mediating role of corporate efficiency using DEA. Green Finance, 6(3), 518–562. https://doi.org/10.3934/GF.2024020

Manurung, L., & Ningsi, E. H. (2023). The Influence of Financial Performance and Profit Management on Company Value. Neraca Keuangan: Jurnal Ilmiah Akuntansi Dan Keuangan, 18(2), 101–114.

Momtaz, P. P., & Parra, I. M. (2025). Is sustainable entrepreneurship profitable? ESG disclosure and the financial performance of SMEs. Small Business Economics, 64(4), 1535–1564. https://doi.org/10.1007/s11187-02400981-5

Ndoka, S., Hysa, E., & Kruja, A. (2025). Barriers to ESG adoption among small and medium enterprises. Sustainability, 17(2), 1–20.

Ningsi, E. H., & Hastalona, D. (2026). Digital Safety Management Systems and Green Finance for MSMEs Financial Sustainability: Evidence from ESGBased Risk Management. Oluwagbade, O. I., Awotomilusi, N. S., Oshatimi, O. O., Adekoya, A. C., & Adebiyi, I. M. (2026). Economic sustainability practices and financial performance of largest listed companies in Sub-Saharan Africa. Parikalpana: Journal of Sustainability, Business and Social Innovation. https://doi.org/10.1108/PJSBSI-10-2025-0057

Organisation for Economic Co-operation, & Development. (2023). G20/OECD Principles of Corporate Governance 2023. OECD Publishing. https://doi.org/10.1787/ed750b30-en

Pilla, L. H. L. D., Peci, A., & Leite, R. D. O. (2026). State-owned enterprises, public corporate governance codes, and financial performance: evidence from Brazil. Corporate Governance. https://doi.org/10.1108/CG-03-20250175

Ranjan, D., Singh, M. P., & Chakraborty, A. (2026). Developing social Wahyuni et al. 10.61194/ijtc.v7i4.2557 sustainability reporting framework for manufacturing SMEs using ISM approach: an Indian perspective. Social Responsibility Journal. https://doi.org/10.1108/SRJ-12-2024-0908

Shari, W., Abu Hassan, M. H., Harun, S. L., & Maamor, S. (2026). Bridging stakeholder influence and environmental, social and governance (ESG) practices through knowledge: insights from halal micro, small and medium enterprises (MSMEs). Journal of Islamic Accounting and Business Research. https://doi.org/10.1108/JIABR-09-2025-0580

Velte, P. (2024). ESG performance and financial performance: A meta-analytic review of moderating effects and contextual contingencies. Business Strategy and the Environment, 33(2), 1045–1063. https://doi.org/10.1002/bse.3774

Yun, P., Liu, C., Huang, X., & Ni, L. (2026). Can ESG performance promote corporate green innovation in China? Micro evidence from innovation element-driven perspective. International Journal of Innovation Science. https://doi.org/10.1108/IJIS-07-2025-0362

Yusliza, M. Y., Norazmi, N. A., Juhari, N. F., & Faezah, J. N. (2023). Corporate governance, sustainability practices and organizational performance: Evidence from emerging economies. Sustainability, 15(12), 9234. https://doi.org/10.3390/su15129234

Zarefar, A., Andreas, A., Zarefar, A., Agustia, D., & Nasir, A. (2026). Does the effect of good corporate governance on sustainability reporting strengthen by the presence of women on corporate boards? Asian Journal of Accounting Research. https://doi.org/10.1108/AJAR-12-2024-0496