["Business Strategy and the Environment, EarlyView. ", "\nABSTRACT\nPersistent structural disparities across European Union Member States create heterogeneous environments that shape firms' capacity for sustainability‐oriented transformation. This study investigates how differences in innovation and digital capacity, human capital development, and economic performance contribute to these uneven transformation capabilities across 27 EU countries during 2010–2022. Two composite indices were constructed using Principal Component Analysis, namely the Innovation and Digital Capacity Index (IDCI) and the Human Capital Index (HCI). Fixed‐effects panel models estimated with Driscoll–Kraay standard errors reveal that innovation and digital capacity positively influence human capital development both contemporaneously (β = 1.202, p < 0.01) and through persistent lagged effects (β = 1.355, p < 0.01). Human capital subsequently contributes to economic performance (β = 1507.928, p < 0.05), indicating that it acts as a key transmission mechanism through which innovation resources are transformed into economic outcomes. The findings suggest that structural disparities influence firms' opportunities to generate, absorb, and exploit knowledge, thereby shaping their capacity to engage in sustainability‐oriented transformation. Strengthening innovation ecosystems and human capital development therefore emerges as a prerequisite for more balanced and resilient sustainability transitions across the European Union.\n"]