The study addresses a critical gap in the literature by examining the integration of environment, social and governance (ESG) in Banking and their impact on SMEs in Kenya. SMEs contribute 34% to GDP and over 80% of employment but face significant credit access barriers (only 23% access bank loans). Unlike prior studies focusing on large corporations or developed markets, this research targets an underexplored emerging market context. The study employs a robust mixed-methods approach, combining quantitative regression analysis (via SPSS) with qualitative interviews from 79 SME owners (79% response rate) and 10 bank executives. A novel contribution of the study is the development of a customized ESG performance index with 15 equally weighted indicators across environmental, social, and governance dimensions, tailored to Kenya’s context and validated by experts. Regression results revealed that, ESG lending has a positive yet statistically insignificant impact on credit access (B = 0.010, p = 0.816), with macroeconomic factors (interest and inflation rates) showing stronger negative effects (R² = 0.178); ESG screening had a significant positive effect on resilience during economic shocks (B = 0.094, p = 0.025; R² = 0.162); and ESG-driven finance significantly improved bank asset quality (B = 0.462, p < 0.001).Qualitative evidence supports the view that, SMEs who adhere to the ESG have a high quality of governance, reduced default rates and greater resiliency, especially when economically distressed (e.g., COVID-19). The study proposes actionable recommendations, including a national ESG framework with tiered reporting standards, fiscal incentives (e.g., tax rebates), adopting an online ESG scoring system, and public-private partnerships to enhance SME credit access, resilience, and bank asset quality.
