Measuring digital-sustainability readiness in industrial SMEs: a composite index and empirical evidence

Purpose This study aims to investigate the readiness of medium-sized industrial small and medium-sized enterprises (SMEs) for the twin transition. It introduces the digital-sustainability readiness index (DSRI), a composite indicator to assess firms’ capacity to integrate digital technologies and sustainability practices. Addressing a gap in environmental, social and governance (ESG) and digitalization research, the DSRI measures internal maturity across processes, systems and disclosures. In light of regulatory shifts like the European Union Corporate Sustainability Reporting Directive and double materiality reporting, the study explores how digital-sustainability readiness relates to financial performance, offering a tool to evaluate transformation potential and guide strategic adaptation in the evolving landscape of sustainable and digital innovation. Design/methodology/approach The DSRI is based on three standardized proxies: value added per employee (productivity), share of university graduates (human capital) and tangible investments (infrastructure). The analysis draws on 24 sectoral-territorial clusters of Italian medium-sized enterprises, using data from the Unioncamere–Mediobanca report (2011–2020), which covers 4,000 firms with 50–499 employees and revenues between €16 and 355m. These clusters represent Italy’s medium-sized business fabric. Time series analysis and ordinary least squares (OLS) regression were used to test the relationship between DSRI and average return on investment (ROI), accounting for industry and regional factors to assess digital-sustainability readiness and its link to firm performance. Findings The analysis demonstrates a positive and statistically significant relationship between the DSRI and firms’ economic performance. This confirms that digital and organizational readiness can act as strategic enablers of profitability in the context of sustainability reporting obligations. Industry-specific factors play a more decisive role than regional ones: sectors such as food and chemical-pharmaceutical consistently show higher DSRI and ROI values, while the geographical macro-area (North, Center and South) does not emerge as a significant determinant. The time series trend analysis confirms the structural stability of the indicators, justifying the use of 10-year averages and reinforcing the robustness of the index. Research limitations/implications The DSRI contributes both theoretically and practically. For researchers, it offers a structured and replicable framework for measuring SME readiness in the digital-ESG domain, expanding the application of the resource-based view and intellectual capital theory to sustainability reporting. The DSRI provides a diagnostic and benchmarking tool for practitioners and policymakers to support strategic decision-making, identify systemic weaknesses and design targeted policy interventions. It can help prioritize public investment, guide incentive schemes and support capacity building in sectors lagging in digital sustainability integration. Originality/value This paper provides a unique contribution by proposing an original, empirically validated composite indicator explicitly designed for medium-sized firms, central to the European economy but often overlooked in mainstream ESG measurement frameworks. By integrating digital, human and infrastructural dimensions into a single readiness index, the DSRI fills a methodological gap and supports the operationalization of double materiality in performance assessment. Unlike most prior studies, which focus on compliance or communication practices, this research links internal capability structures with measurable economic outcomes, offering new insights into how digital and sustainable strategies interact within organizational ecosystems.