How Artificial Intelligence and External Environmental Factors Drive Sustainability in Pakistani SMEs

The Relationship Between Artificial Intelligence and Environmental Performance: The Mediating Role of External Environmental Factors

Small and medium enterprises (SMEs) in emerging economies face significant challenges in improving their environmental performance (EP). Limited resources, outdated technologies, and weak infrastructure often restrict their ability to operate sustainably. However, artificial intelligence (AI) offers practical tools to help SMEs reduce energy consumption, improve waste management, and track environmental impact effectively.

This article explores how AI positively influences environmental performance in SMEs, with a special focus on the role of external environmental factors such as carbon emission strategies and sustainability regulations. It draws on dynamic capability theory (DCT) to explain how these elements interact to support sustainable development goals (SDGs).

Why AI Matters for Environmental Performance in SMEs

AI technologies, including predictive analytics and automated monitoring, enable SMEs to optimize resource use and reduce their environmental footprint. Green AI, which prioritizes energy efficiency, is particularly relevant for countries like Pakistan where SMEs contribute significantly to the economy but often lack modern tools.

By integrating AI, SMEs can better align their operations with SDGs, reduce carbon emissions, and improve overall environmental stewardship. This approach helps overcome traditional barriers such as inefficient energy use and waste management practices.

The Influence of External Environmental Factors

External factors like carbon emission policies and sustainability regulations are critical in shaping SMEs' environmental outcomes. These frameworks push businesses to adopt cleaner technologies and adhere to environmental standards.

While internal efforts matter, external pressures and support mechanisms are essential in ensuring that AI adoption translates into meaningful environmental improvements. Policies that encourage sustainable practices amplify the benefits AI brings to SMEs, helping them stay compliant and competitive.

Dynamic Capability Theory: A Useful Lens

DCT explains how organizations adapt to changing environments by reconfiguring their resources and capabilities. In this context, AI acts as a dynamic capability that allows SMEs to innovate and adjust their processes to meet environmental goals.

External environmental factors serve as catalysts that enhance the effectiveness of AI, enabling SMEs to respond proactively to regulatory and market demands. This combination fosters greater flexibility and improved environmental performance.

Key Findings and Practical Implications

• AI positively impacts environmental performance: SMEs using AI show measurable improvements in managing energy consumption and reducing waste.
• External factors mediate AI's impact: Carbon emission strategies and sustainability regulations strengthen the link between AI use and environmental outcomes.
• SMEs should integrate technology and policy: Leveraging AI alongside compliance with environmental standards offers a practical pathway for SMEs to enhance sustainability.

For managers and policy makers, this means fostering environments where AI adoption is supported by clear regulations and sustainability initiatives. Encouraging SMEs to engage with both technology and external frameworks will drive better environmental results.

Methodology at a Glance

The insights come from a quantitative study involving 387 employees across Pakistani SMEs in manufacturing, textile, and pharmaceutical sectors. Using structured questionnaires analyzed through Partial Least Squares Structural Equation Modeling (PLS-SEM), the study validated the positive relationships between AI, external factors, and environmental performance.

Conclusion

AI holds significant potential to improve environmental performance in SMEs, especially when supported by external environmental policies. The dynamic interplay between technology adoption and regulatory frameworks enables SMEs to align with sustainable development goals more effectively.

Businesses looking to boost their sustainability efforts should focus on integrating green AI solutions with compliance to carbon emission standards and sustainability regulations. This combined approach not only benefits the environment but also strengthens SMEs' resilience and market position.

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