["Business Strategy and the Environment, EarlyView. ", "\nABSTRACT\nEU‐based SMEs and startups developing AI systems face dual challenges at the intersection of sustainability and technology regulation. A regulatory gap exists because environmental law does not govern AI as an environmental actor, while the EU AI Act addresses sustainability largely through voluntary provisions, leaving firms to navigate fragmented expectations without coherent guidance. An ethical gap emerges because deontological and consequentialist reasoning structures both regulatory regimes, shapes organizational compliance, and is embedded in AI system design, yet proves insufficient at all three levels for addressing complex sustainability trade‐offs and unprecedented environmental challenges. We develop a virtue‐in‐the‐loop (VITL) framework that operationalizes environmental virtue ethics across the AI development lifecycle by mapping 10 environmental virtues to six development stages. This equips SMEs with a lifecycle‐based deliberation tool that guides sustainability decision‐making when compliance and codification are insufficient, addressing a critical gap in practical environmental strategy frameworks for resource‐constrained technology firms.\n"]