**5. Discussion**

This study advances knowledge about how a firm's ESG performance can be enhanced by its transformational leadership style. While the existing literature has investigated consequences of ESG performance, empirical studies on the transformational leadership–ESG performance outcome link are lacking. This study explored the action mechanisms between transformational leadership and ESG performance of SMEs from a strategic perspective, using a combination of higher-order theory, a resource-based view, and stakeholder theory. A questionnaire was administered to SME employees and senior leaders in a Chinese context, with transformational leadership as the dependent variable, corporate ESG performance as the independent variable, organizational innovation as a mediating variable between transformational leadership and ESG performance, and external social capital as a moderating variable between transformational leadership and organizational innovation. The conclusions of the study follow:

First, transformational leadership positively affects ESG performance in SMEs. Transformational leadership is an inherent element that focuses on the personal development of employees and creates a positive environment for their development through visionary motivation and personalized care [134]. In short, it is a leadership style that creates a positive environment for employees to develop. Transformational leaders are well positioned to integrate corporate sustainability with ESG performance, leading by example and communicating to employees through vision statements so that the employees have a clear understanding of the importance of ESG performance to corporate sustainability.

Second, organizational innovation partially mediates the linkages between transformational leadership and corporate ESG performance. For instance, transformational leaders help employees acquire knowledge and skills to enhance innovation through intellectual stimulation and visionary motivation, adopt innovative approaches to effectively increase employee motivation, and continuously improve employee motivation levels so that employees internalize organizational innovation goals as their own valued goals [135], thus improving ESG performance.

Third, external social capital positively moderates the direct relationships between transformational leadership and organizational innovation. External social capital is the bridging capital that connects the entire social relationship network. At the same time, it can expand diversified knowledge-source channels for the firm [136]. When an organization has a lot of external social capital, transformational leaders can broaden information channels through problem identification, information search, and accessing external knowledge and resources. This helps the organization improve its capabilities for organizational innovation [127].
