PurposeDigitalization and digital strategy have become one of the variant concepts these days since the fourth industrial revolution 4.0. The earlier debate a on the role of digital strategy and degree of digitalization for environmental and sustainable performance of small and medium enterprises (SMEs) is at its nascent stages. This study aims to investigate the impact of digital strategy and digitalization on the environmental performance in Pakistani SME’s during the pandemic times. In addition, it explores the mediating role of five measures of digitalization degree such as overall digitalization degree (ODD), digitalization methods (OM), digital technology adaptation (DTA), digital product services (DPS) and digital processes (DP).MethodsThis study collected data from 298 respondents using random sampling technique. The unit of analysis was managerial staff and employees working for the organization for last 5 years. To investigate the relationship between constructs, we considered Structural-equation modeling (SEM) using SMART-PLS.ResultsBuilding on the contingency theory, the findings of the research reveal that digital strategy showed  a positive impact on digitalization measures but negatively impacted on overall environmental performance. In addition, (DP) ODD, OM, and DPS showed a (negative) positive meaningful impact on environmental performance and (partially) fully mediated the relationship between digital strategy and environmental performance. The digital strategy failed to improve the environmental performance however the role of digitalization is crucial to ensure environmental sustainability.ConclusionsDigital strategy alone fails to alleviate the pressure on environmental performance however excessive digitalization can aggravate the adverse consequences on environment. This research provides useful implications for governments and policymakers to avoid excessive digitalization.Supplementary InformationThe online version contains supplementary material available at 10.1007/s44265-023-00010-5.