This chapter expounds on the complex correlation between organizational innovation, digital leadership, and the mediating variable (artificial intelligence (AI)) within the framework of a circular economy. In a large sample size (390 respondents), the authors use exploratory and confirmatory factor analysis (CFA). The results indicate that organizational innovation indeed promotes very effectively the digital leadership capabilities, which are again paired down by AI technologies. The mediation effect is an indication of how AI can support creative practices and decision-making systems to enhance sustainable practices in a circular economy. The chapter explains what the findings mean to organizations interested in going through the barriers presented by the environmental sustainability while utilizing digital transformation. It reinforces the necessity of leaders to implement AI into their innovation plans in order to create sustainability and flexibility culture. By filling the gap between theoretical insights and practical practice.