Financial Literacy and Sustainability: The Mediating Role of Innovation Capabilities

Abstract

This study examines the influence of Financial Literacy on Financial Sustainability and Environmental Sustainability in Batik Small and Medium Enterprises (SMEs) in Bantul Regency, Yogyakarta, as well as the mediating role of Innovation. Based on the Resource-Based View (RBV) and Sustainability Theory (Triple Bottom Line), small enterprises face significant challenges in balancing economic profitability with ecological responsibility. A quantitative empirical investigation was conducted using a purposive sample of 100 Batik SME owners/managers. Data were collected via structured questionnaires and analyzed using Partial Least Squares Structural Equation Modeling (PLS-SEM) with 5,000 bootstrap resamples. The results indicate that Financial Literacy has a direct positive and significant effect on Innovation Capability, Financial Sustainability, and Environmental Sustainability. Furthermore, Innovation significantly impacts Financial Sustainability and Environmental Sustainability. Mediation testing reveals that Innovation acts as a complementary (partial) mediator in the relationship between Financial Literacy and Financial Sustainability as well as Environmental Sustainability. These findings underscore that enhancing financial capabilities empowers SME managers to adopt eco-friendly production technologies and business model innovations, simultaneously fostering economic resilience and environmental stewardship.