Unlocking Innovation through ESG: The Mediating Role of Ethical Climate and Stakeholder Trust in Pakistan’s Textile Sector

Abstract

In response to growing global pressures for sustainable business practices, this study investigates how Environmental, Social, and Governance (ESG) performance contributes to firm innovation capability, focusing on the textile industry in Pakistan. Drawing on Stakeholder Theory, the study proposes a parallel mediation model in which organizational ethical climate and stakeholder trust serve as mediating mechanisms. Data were collected from 410 textile firms through structured questionnaires targeting key decision-makers, including sustainability officers, production heads, and supply chain managers. Using Hayes’ PROCESS macro (Model 4) with 5,000 bootstrap samples, the results reveal a full mediation effect: ESG performance does not directly influence innovation capability; instead, it operates entirely through improvements in ethical climate and stakeholder trust. Notably, the mediating role of ethical climate was stronger than that of stakeholder trust, highlighting the internal organizational culture as a more critical pathway for translating ESG efforts into innovation outcomes. These findings offer important theoretical contributions by deepening our understanding of the mechanisms through which ESG performance enhances firm innovation, particularly in sustainability-sensitive industries. The study also provides empirical insights from an emerging market context, emphasizing the strategic value of ESG as a driver of competitive advantage through innovation. Limitations include the cross-sectional nature of the data and reliance on self-reported measures. Future research is encouraged to explore longitudinal and comparative analyses across industries and regions. Overall, the study underscores the importance of fostering ethical practices and stakeholder trust to unlock the full innovative potential of ESG initiatives in the textile sector.