The concept of the circular economy refers to a system that is based on the regeneration of products, recycling of materials, and waste management; circular economy focuses on minimum wastage of materials and products and their reuse functionality, thus mitigating carbon emission risks and reducing climate change-based challenges. Due to changing and turbulent business and natural environment, there is a shift from a traditional economy, which was based on make, use, and waste concept, towards the contemporary concept of circular economy, which is based on the reduction of overconsumption, reuse of materials, recycling of products, and their regeneration in order to protect the environment. The concept of sustainability and circular economy are closely related to each other as the principle of circular economy is directed towards environmental protection and sustainability of firms in the long run while taking care of the natural resources, materials, and natural ecosystem. Present study highlights the role and importance of circular economy in the changing dynamics of Industry 4.0, the interlinkages between sustainability and circular economy, and its associated challenges. The work would highlight the role and importance of small and medium firms (SMEs) while achieving sustainability in present times, how small firms can contribute towards sustainability, ESG, and the different key challenges or barriers faced by these small firms while adopting ESG-based frameworks and climate-friendly business models. This chapter will also discuss the importance of small firms in economic, social, and inclusive development, especially in emerging economies, shifting of SMEs towards sustainable business models and sustainable ecosystems. Various challenges faced by small firms while implementing sustainable business models in a circular economy have been addressed at the end of this chapter.