Firms increasingly need to consider environmental issues as a result of stricter governmental regulation and due to growing pressures from a broad range of stakeholders. The literature on environmental management is vast but not much is known about firm-specific capabilities that facilitate the adoption of environmental practices and environmental collaboration. Drawing on the dynamic capabilities literature, this study identifies the adoption of advanced technology, experiences with inter-firm relations and capacity for product innovation as three capabilities that support firms' efforts to become ‘greener’. Descriptive statistics portray the diffusion of the related management practices among 294 small and medium-sized manufacturers from the United States. Based on regression analysis, the authors provide evidence for a relationship between the underlying capabilities and environmental management practices. Consequently, the results point to additional benefits of known strategic capabilities and suggest how firms should approach sustainability initiatives by developing certain competencies first. Copyright © 2012 John Wiley & Sons, Ltd and ERP Environment.