Grease the Wheel! An Empirical Study on Environmental, Social, and Governance ( ESG ) and SMEs ' Performance in the ICT Industry

ABSTRACT This study investigates the relationship between Environmental, Social, and Governance (ESG) performance and firm value among European Small and Medium Enterprises (SMEs) in the Information and Communication Technology (ICT) sector. While existing literature predominantly focuses on large corporations, ESG dynamics within SMEs remain underexplored despite their growing relevance in sustainability transitions. By using annual panel data from 2010 to 2023 and applying a fixed‐effects regression model, the analysis identifies an inverted U‐shaped relationship between ESG performance and firm value, suggesting the presence of an optimal ESG engagement level beyond which marginal returns decline. The study further finds that board independence significantly moderates this nonlinear relationship. Independent boards not only exert a direct positive influence on firm value but also help balance ESG investment, reducing the risks associated with both under‐ and overinvestment. These findings underscore the crucial role of governance structures in influencing the financial outcomes of ESG strategies. By examining the direct and moderating effects of ESG engagement, this research advances theoretical understanding. It offers practical insights into how SMEs can strategically implement ESG to enhance long‐term value creation within the ICT sector.