FROM COMPLIANCE TO CAPABILITY: HOW MSMES TRANSLATE SUSTAINABILITY ACCOUNTING INTO BUSINESS DECISIONS

Abstract

Sustainability accounting is increasingly relevant for Micro, Small, and Medium Enterprises (MSMEs). Yet, existing research has focused mainly on sustainability reporting and ESG disclosure, leaving the internal process — how sustainability information becomes accounting information used in managerial decisions — underexplored. This study examines how MSMEs translate sustainability practices from informal, compliance-oriented activities into organizational capabilities that support business decisions. Using a qualitative approach — semi-structured interviews, observation, and document analysis with MSME owners, managers, and accounting or operational staff — data were analyzed through thematic analysis and interpreted using Institutional Theory and Dynamic Capabilities Theory. Findings show that sustainability practices typically begin with pragmatic concerns such as cost efficiency, resource use, waste reduction, customer requirements, employee welfare, and business continuity. Sustainability-related information already exists within conventional accounting and operational records but remains fragmented until MSMEs begin measuring impacts, integrating information into accounting systems, and repeatedly using it in decision-making. The study proposes a Sustainability Accounting Capability Framework with four stages — Compliance Awareness, Sustainability Measurement, Accounting Integration, and Strategic Capability — repositioning sustainability accounting as an internal decision-making capability rather than a reporting mechanism.