Driving sustainable environmental performance in Smes: the interplay of ethical leadership, circular economy, and environmental management control

The study aims to examine the direct effects of ethical leadership and the circular economy on environmental performance. Furthermore, it provides empirical evidence on the mediating role of the Environmental Management Control System (EMSC) in the relationship between ethical leadership, the circular economy, and environmental performance. A quantitative approach, utilizing a survey method, was employed. The respondents were micro, small, and medium enterprises (MSMEs) located in Semarang Regency, registered under the MSME Centre, and selected based on their implementation of circular economy practices and EMCS. A total of 203 valid responses were analyzed using Partial Least Squares Structural Equation Modeling (PLS-SEM). The results indicate that the circular economy has a direct positive effect on environmental performance. However, ethical leadership does not have a direct and significant effect on environmental performance. Moreover, EMCS serves as a mediating variable in the relationship between ethical leadership and the circular economy, as well as their impact on environmental performance. The findings offer practical implications for MSME owners and policymakers to strengthen EMCS as a strategic tool to support the implementation of a circular economy, aimed at enhancing environmental performance. Additionally, MSME leaders seeking to apply ethical leadership principles must establish an adequate environmental control system as a key driver in achieving improved environmental outcomes. This study is limited by its reliance on self-reported data, which may introduce potential bias. Furthermore, it lacks a comprehensive exploration of external factors such as government regulations and market dynamics. This study is distinctive in its exploration of the mediating role of EMCS in the relationship between ethical leadership, the circular economy, and environmental performance, grounded in the Resource-Based View (RBV) theory. It also contributes to filling a gap in the literature by providing novel insights into the implementation of circular economy and ethical leadership practices among MSMEs in developing countries.