Assessing the Interplay between Financial Trade-offs and ESG Practices in Small Restaurants

Abstract

<This study examines whether environmental and governance (E&G) practices enhance or constrain performance in small European restaurants, a sector that is increasingly exposed to sustainability demands yet remains underrepresented in recent ESG research. While prior studies on large and listed firms typically report positive sustainability performance links, evidence for micro and family-owned restaurants remains scarce. This research gap is particularly critical because these small businesses are most likely to be significantly affected by emerging regulatory frameworks, such as the EU’s CSRD, given their limited resources and narrow margins. Addressing this gap, we assess whether E&G practices operate as strategic resources or instead generate short-term financial trade-offs in resource-constrained settings. Using data from 1,390 small restaurants and applying partial least squares structural equation modelling (PLS-SEM), we evaluate the effects of E&G practices on operational efficiency, profitability, and productivity. Results reveal significant negative associations across all outcomes, indicating that E&G adoption may increase operational and financial pressures without producing immediate improvements. The study contributes to the hospitality and SME sustainability literature in three ways. First, it provides sector-specific evidence on how E&G practices shape firm outcomes in small restaurants. Second, it clarifies the short-run tensions SMEs face when implementing sustainability initiatives amid emerging regulatory expectations. Third, it advances an approach for measuring observable E&G practices in micro-enterprises, addressing persistent challenges in sustainability-SME assessment. Overall, the findings question assumptions of uniformly positive sustainability effects and underscore the need for context-sensitive sustainability policies and managerial strategies in the hospitality sector.