Green Finance Adoption and Financial Sustainability of SMEs: The Mediating Role of Green Investment Decision-Making and the Moderating Role of Financial Literacy

Abstract

The growing urgency of climate change and environmental degradation has elevated the importance of sustainable financial practices, particularly for small and medium-sized enterprises (SMEs) in developing economies. Green finance has been recognized as a key driver of sustainability, yet gaps remain in understanding how decision-making processes and individual capabilities shape its impact on financial outcomes. This study examines the influence of green finance adoption on the financial sustainability of SMEs, exploring the mediating role of green investment decision-making and the moderating effect of financial literacy. By applying Behavioral Reasoning Theory (BRT), the research investigates how cognitive and contextual factors interact to foster sustainability-oriented financial practices. A quantitative, cross-sectional design was employed, targeting SMEs in Pakistan’s manufacturing sector. Data were collected through validated survey instruments and analyzed using SmartPLS to test the measurement and structural models. Constructs measured included green finance adoption, green investment decision-making, financial literacy, and financial sustainability. Results reveal a significant positive effect of green finance adoption on SMEs’ financial sustainability. However, the mediating effect of green investment decision-making was positive but statistically insignificant, highlighting contextual barriers in translating finance into sustainable outcomes. Surprisingly, financial literacy negatively moderated the relationship between green finance adoption and financial sustainability, suggesting that higher literacy may foster cautious, risk-averse behaviors that dilute potential benefits. No significant moderation was found between green finance adoption and investment decision-making. These findings provide nuanced insights into the complex dynamics shaping sustainability-oriented financial practices in emerging economies.

Keywords: Green Finance Adoption, Financial Sustainability, Green Investment Decision-Making and Financial Literacy