ABSTRACT The necessary environmental transition involves a substantial challenge for micro, small, and medium‐sized enterprises (MSMEs). Moreover, in the Ibero‐American context, it is even more challenging. Our study aims to shed light on the scarce and inconclusive evidence in this regard, analyzing the influence of digitalization, given its inclusion in the so‐called MSMEs' double transition, as well as the effect of the institutional setting. The so‐called double transition is more sensitive in emerging areas. By means of analyzing direct and moderation effects on a representative database of 17.498 Ibero‐American MSMEs, we aim to show the existence of linear and nonlinear relationships that determine the level of environmental involvement of those organizations. Our results show that the expected positive effect of digitalization exists, but it is not linear, but U‐shaped. The extension of the Kuznets curve is confirmed for digitalization in MSMEs. Additionally, the institutional context's positive influence also moderates this nonlinear influence. These findings involve the need for not only digital technologies but also a transformational internal process, which is influenced by institutional quality. Managers need to understand the importance of substantial organizational commitment and their own transformational capacity in the dual transition to avoid negative effects. In this vein, institutions must focus on reducing the duration of the downward part of the U‐shaped influence of digitalization. Ultimately, digital transformation and institutional quality must move forward to sustainable change in MSMEs aligned.