This qualitative study examines the environmental behaviour of leatherworking SMEs in Pakistan. It investigates the environmental drivers, enablers and barriers in these firms. The study makes an empirical contribution by examining an under-researched developing economy context, Pakistan, which has distinct institutional settings compared to many other countries, especially the developed ones. It also offers a methodological contribution by demonstrating that a hybrid theoretical framework informed by institutional theory, resource-based view, natural-resource-based view and dynamic capabilities perspective offers a better approach to develop the holistic and in-depth understanding of the environmental behaviour of SMEs. It enables the researcher to effectively capture the interactive effect of internal and external factors on the environmental transformation of SMEs. Grounded analysis of interview data has revealed that multilevel (micro-meso-macro) factors, such as environmental requirements of international customers, regulations of export markets, intermediary organisations and peers, operate in conjunction to exert the coercive, normative and mimetic isomorphic pressures on leatherworking SMEs to behave environmentally responsibly. Sustainability values of owner-managers, financial benefits and aspirations for image building also drive these firms to reduce their environmental footprints. Contributing theoretically, the study finds that dynamic capabilities for ecological learning, seizing environmental opportunities and enterprise reconfiguration enable environmentally progressive and moderate SMEs to reduce their pollution load. Social capital, environmentally proactive owner-managers and support programmes of cleaner production centres serve as key microfoundations to these capabilities. More specifically, due to the absence of effective formal institutional support, cleaner production centres have acted as the (informal) compensatory institutional structures and proto-institutional sponsors striving to institutionalise cleaner production practices in the leather industry. Through developing ‘eco-literacy’ skills amongst SME owners, managers and employees they have been motivating and enabling them to adopt innovative eco-friendly production processes and cleaner technologies. Some other capabilities including pollution prevention, product stewardship, absorptive capacity and strategic proactivity serve as precursors to the presence of these capabilities. Policy implications relate to addressing the financial barriers and institutional ‘gaps’, developing human resources and infrastructure, and better management of tannery clusters