<p>This research investigates how MSMEs may become more sustainable by combining responsible AI (RAI) with green innovation. Although AI has revolutionary potential to boost eco-innovation and operational efficiency, the leadership’s role in coordinating new technologies with sustainable goals is not well acknowledged. The study adds to the expanding debate over the sustainable performance of MSMEs by investigating how leadership influences ethical, environmental, and economic responsibility within the organisational landscape. A mixed-methods approach was employed, beginning with quantitative analysis on 321 MSME respondents, followed by qualitative analysis. A disjoint two-stage approach using PLS-SEM is followed by meta-inferences to evaluate the hypothesised model. The findings suggest the RAI significant effect on MSMEs’ sustainable performance as well as green innovation. The influence of green innovation and RAI on sustainability is favourably moderated by sustainable transformational leadership (STL), underscoring the crucial role that leadership plays in promoting environmental and digital change. The research provides implementable recommendations for MSME leaders, industry professionals, and policymakers to incorporate RAI into business strategies, thus fostering green innovation and ensuring long-term sustainability. It affirms the key contribution of STL in overcoming barriers to AI adoption, aligning technology with sustainable goals. The study integrates RAI, green innovation and STL into a single paradigm, particularly in the unexplored setting of MSMEs. It reconceptualises RAI as a strategic factor behind sustainable performance and leadership, providing a novel viewpoint on how responsible behaviour may improve organisation performance and contribute to broader sustainability goals.</p>