Accelerating the Green Shift: How Green Digital Transformation Capabilities Foster Sustainable Innovation Performance Through Circular Economy Readiness and Business Innovation Environment

ABSTRACT With climate concerns intensifying and global sustainability goals gaining momentum, environmental management has shifted from a reactive stance to a proactive pursuit of innovation and transformation. Modern firms are now challenged to embed environmental responsibility within their core strategies and digital initiatives to remain viable in the changing industrial landscape. This study examines how green digital transformation capabilities enhance sustainable innovation performance through environmental strategy, while emphasizing the moderating roles of circular economy readiness, business innovation environment, and financial resilience. By utilizing the theoretical framework of dynamic capability, we put forward that green digital transformation influences the environmental strategy in a favorable way, which, in turn, influences sustainable innovation performance. Data were collected from 393 Chinese manufacturing firms using a three‐wave time‐lagged survey design. The results confirm that environmental strategy mediates the relationship between green digital transformation capability and sustainable innovation performance to allow firms to make use of digital technologies when making strategic decisions and risk management. Moreover, it has also been found that the interaction between green digital transformation capability and environmental strategy is significantly moderated by circular economy readiness, allowing digital transformations to perform better in companies ready to embrace sustainable practices. Also, the business innovation environment and financial resilience have a greater moderating effect on the environmental strategy and sustainable innovation performance relation in dynamic market conditions. The findings expand DCT by elaborating the process of sensing environmental opportunities through digital transformation, capturing environmental opportunities through environmental strategy, and reconfiguring resources into sustainable innovation outcomes. The study has practical implications for managers as well by demonstrating that integrating digital, environmental, and financial capabilities helps firms create resilience and maintain innovation performance in an increasingly volatile post‐pandemic world.