Linking circular economy financing to perceived SDG-aligned performance through sequential capability pathway of green innovation and organisational resilience

Abstract Despite the growing global emphasis on sustainable finance as a driver of the circular economy, the organisational mechanisms through which financial intermediaries translate circular economy financing into tangible sustainable development outcomes remain underexplored, particularly in institutionally constrained environments. This study investigates how microfinance institutions (MFIs) in Ethiopia-a critical case of an institutional void-convert circular economy financing and green finance into perceived SDG-aligned performance, particularly contributing to SDG 1 (No Poverty), SDG 7 (Affordable and Clean Energy), SDG 8 (Decent Work and Economic Growth), and SDG13 (Climate Action). Drawing on the Resource-Based View and Dynamic Capabilities theory, we propose a sequential capability-building pathway, where green innovation and organisational resilience mediate the finance-to-performance relationship. Using survey data from 287 senior managers across 23 licensed Ethiopian MFIs, we employ covariance-based structural equation modelling (CB-SEM) to test the hypothesized relationships. The results reveal that organisational resilience (β = 0.500, p < .001) and green innovation (β = 0.241, p = .003) are the primary direct drivers of perceived SDG-aligned performance. Mediation analysis confirms that circular economy and green finance operate indirectly through green innovation, which in turn fosters organisational resilience (CEF ➔ GI ➔ ORE ➔ SDG: β = 0.142, P < .001). Findings highlight that sustainable finance achieves impact through capability development rather than direct capital allocation, underscoring the need to institutionalize internal adaptive capabilities for effective circular economy transitions.

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