5. Industrial policies for the SDGs

Several policy tools can be used to foster the contribution of firms to SDGs

A wide array of policy instruments affect firms’ behaviour and actions related to sustainability. Two distinctions are particularly useful. First, some industrial policies have broader objectives (e.g. productivity growth, innovation, competitiveness) and do not target sustainability, whereas others are specifically designed to contribute to the attainment of the SDGs. Second, policy instruments may affect firms through different channels, as detailed in Box 5.1.

Even if standard industrial policies do not specifically aim at promoting sustainability, they have the potential to indirectly incentivise firms to contribute to the SDGs. Such policies can be found in virtually any category of the taxonomy described in Box 5.1 (e.g. competition policies, provision of skills, product standards).

Beyond standard industrial policies, other instruments also directly target SDGs (e.g. promotion of social entrepreneurship, public disclosure of pro- and anti-SDG behaviours, targeted innovation subsidies, and green industrial policies). The next section reviews these policy initiatives in a sample of seven countries and the European Union. They can be classified into three types:

• Rewards and incentives. These policies aim to reduce costs or risks associated with starting/scaling a business or investing in sustainability (e.g. through subsidies, financing instruments). They can also promote best-in-class firms, for example through awards that help businesses attract customers, investors or employees, by promoting their achievements and credentials. Most of the policies of this type are “investment incentives” (Box 5.1). However, some instruments of this type can also be considered as affecting industry dynamics (“between” instruments). By promoting best-in-class firms, they can contribute to a reallocation of activity towards more sustainable businesses.

• Government assistance. These policies consist of various schemes that either enable firms to access relevant information (e.g. guidelines, toolkits, mentorship programmes, training, support for matching potential customer needs to technology seeds), provide legal frameworks, or remove regulatory barriers to foster contributions to the SDGs (e.g. designating mission-oriented firms). By reducing the cost to develop a sustainable production, they promote the development and the efficiency of sustainable firms. They can also tilt the playing field in favour of the most sustainable firms (for instance through support to social entrepreneurship).

• Mandatory compliance. These types of policies are most commonly regulations or taxes designed to ensure that firms reduce, or do not produce, negative externalities on society (e.g. non-financial disclosure or due-diligence requirements, health and safety or gender-balance requirements, cap-and-trade systems, carbon or fuel taxes). Most of the policies of this type are categorised as affecting firm efficiency (“within” instruments, Box 5.1). They are either “regulations of production”, to ensure that firms avoid producing large negative externalities on society, or “access to inputs” instruments, which work by increasing the cost of some inputs (e.g. fossil fuel). Some mandatory compliance instruments can also be classified as “between”, because they require firms to disclose their impact on the social goods and this may favour firms with more advanced sustainability strategies.

Box 5.1. Taxonomy of industrial policy instruments

The taxonomy of industrial policy instruments (Figure 5.1) developed in other OECD work (Criscuolo et al., forthcoming[1]) builds upon two essential distinctions.

Figure 5.1. Taxonomy of industrial policy instruments

Source: Criscuolo et al. (forthcoming[1]), “An industrial policy framework for OECD countries: Old debates, new perspectives”.

First, it builds on the mainstream split between supply-side instruments and demand-oriented instruments (Edler et al., 2016[2]). Second, among supply-side instruments, the taxonomy further distinguishes between those that affect efficiency within firms and those that affect the allocation of production factors between firms, in the same spirit as in the productivity literature (Olley and Pakes, 1996[3]; Bartelsman and Doms, 2000[4]; Syverson, 2011[5]).

Distinguishing “between” instruments from “within” instruments explicitly accounts for Schumpeterian dynamics and the fact that productivity growth partly comes from creative destruction, in particular the reallocation of production factors from old firms to young firms with a superior technology (Aghion and Howitt, 1992[6]). This distinction is also useful when thinking about the growing contribution of firms to SDGs, which can channel through the “between” and “within” channels.

Governance is regarded as a necessary enabler of successful policy interventions. Therefore, “governance” instruments complement the three main categories of industrial policy interventions. Their role is to co-ordinate stakeholders in the business sector, the public sector and research institutions (e.g. industrial participants, ministries or universities (Larrue, 2021[7])) at both the national and the international level.

Source: Based on Criscuolo et al. (forthcoming[1]), “An industrial policy framework for OECD countries: Old debates, new perspectives”.

From policy instruments to strategies

Beyond industrial policy instruments, governments rely on strategies composed of an array of coherent and complementary instruments targeting specific objectives (typically an SDG). For instance, many countries have now equipped themselves with explicit green industrial strategies (Criscuolo et al., forthcoming[1]; Anderson et al., 2021[8]) including carbon pricing instruments, subsidies for green technologies at various readiness levels (research and development [R&D], demonstration, deployment), regulations, and skill policies. Strategies are included in the policy survey described in the next section.

Previous OECD work distinguishes four types of strategies: sectoral, mission-oriented, technology-oriented and place-based. Although place-based strategies can be relevant to promote local economic development (OECD, 2020[9]), mission-oriented strategies are the most pivotal in achieving addressing societal grand challenges that require the commitment of many stakeholders from the private and the public sector (Box 5.2).

OECD countries’ policy experience in incentivising firms to contribute to SDGs

This section presents the results of a benchmarking exercise covering industrial policy instruments and strategies that specifically target the SDGs in the European Union and seven countries (Canada, Costa Rica, France, Germany, Japan, Korea and New Zealand). These countries were chosen based on the interest and uniqueness of their SDG policies, and to achieve balanced geographical coverage. For the selected countries, government officials have contributed to and reviewed the results of the benchmarking exercise. Moreover, it also includes flagship examples from other countries when relevant.

More precisely, this benchmarking focuses on policies and initiatives of governments and other public entities that:

• target the private sector

• are designed to address one or several SDGs

• are at the national level (or at the European level for the European Union)

• are enacted or currently under discussion.

These policies are classified according to their type (rewards and incentives, government assistance and mandatory compliance) and broken down into four categories of goals (Table 5.1):

• those addressing multiple types of SDGs

• those addressing health, well-being and safety-related SDGs, notably SDG 3-Good Health and Well-Being and SDG 8-Decent Work and Economic Growth

• those addressing equity-related SDGs, notably SDG 5-Gender Equality

• those addressing environment-related SDGs, notably SDG 7-Affordable and Clean Energy, SDG 12-Responsible Consumption and Production, SDG 13-Climate Action, SDG 14-Life Below Water and SDG 15-Life on Land.

The three selected categories of goals correspond to the ones that are frequently cited as relevant by firms (Table 2.4 in Chapter 2), and for which public policies can easily be identified. Environment and health measures were selected due to being directly and frequently related to many firms’ core business activities, and further because numerous policy instruments having to do with these are already in place in many countries. Policies regarding safety and equity are an important and growing concern for many firms, and therefore have been included in the scope of this survey despite rarely being directly related to core business activities.

Figure 5.2. Share of each type of instruments collected, by target SDGs

Notes: SDG = Sustainable Development Goal. The numbers in the bar refer to the number of policy instruments collected for each category.

Source: OECD, based on the OECD survey to seven countries and the European Union, and on governments’ SDG action plans and websites (see Annex E).

 StatLink https://doi.org/10.1787/888934275121

Figure 5.2 presents the number and share of policy instruments collected from this benchmarking exercise. In total, the benchmarking exercise collected 173 policy instruments (excluding strategies). The type of instruments used differ by target SDGs. For policies addressing multiple types of SDGs, the share of government assistance instruments is higher than other target SDGs. For policies addressing health, well-being and safety-related SDGs, the share of mandatory compliance instruments is higher than other target SDGs. For policies addressing equity-related SDGs, the share of rewards and incentives instruments is lower than other target SDGs. For policies addressing environment-related SDGs, the share of rewards and incentives instruments is higher than other target SDGs.

Table 5.1 presents selected policy examples from this benchmarking exercise, whereas the comprehensive list of relevant policies by country is available in Annex E.

The policy examples represented in Table 5.1 were chosen to illustrate the diversity of instruments available to policymakers. However, it does not constitute an attempt to identify best practices. Such a task is beyond the scope of the current report, and there is additionally a lack of evidence regarding the effectiveness of most of these policies. The rest of this chapter draws several conclusions from this benchmarking exercise and, confronting these with the evidence gathered in the previous chapters, the next chapter provides several recommendations for the design of SDG-related industrial strategies.

Main findings from the policy benchmarking exercise

Message 1: Some governments leverage mission-oriented industrial strategies to improve the consistency, comprehensiveness and governance of industrial policies for the SDGs. The narrative of these strategies aligns with the 2030 agenda of the SDGs and beyond (e.g. net-zero carbon emissions in 2050). Recently introduced industrial strategies include the High-Tech Strategy 2025 (Germany), the Horizon Europe (2021) and the Korean New Deal (2020). These strategies are considered as mission-oriented industrial strategies, as they are predominantly “transformation-oriented”. They primarily address the direction of innovation rather than its level, and co-ordinate across policy domains and stakeholders (Box 5.2). They usually include several policy instruments, including governance bodies (Figure 5.1).

More recently, some countries also designed their COVID-19 recovery packages along the lines of the SDGs (Korea, European Union and some of its member countries among others). For instance, the European Recovery Fund, a massive EUR 750 billion plan, aims to repair the economic and social damages caused by the COVID-19 crisis, while ensuring that their economies undertake the green and digital transitions to build a more sustainable and resilient economy.

Message 2: Policy packages often include specific support to start-ups and innovative SMEs in SDG-oriented sectors. Many policy instruments target promising and innovative young firms. For example, J-Startup initiative (Japan) and C-Prize (New Zealand) support start-ups that focus on innovative technologies linked to SDGs. Many of the innovation subsidy/grant programmes such as the European Social Innovation Competition target start-ups and innovative firms. Some governments provide funding to support R&D in innovative SMEs such as through programmes like KMU-innovativ and Zentrales Innovationsprogramm Mittelstand (Germany).

Message 3: Beyond innovative firms, governments also provide more generic support to firms’ sustainability actions. This support is in general available for all firms, but some instruments especially target small firms, which may encounter more difficulties to undertake sustainability shifts. As shown in Chapter 2, SMEs seem less likely to take action, and to develop products and services targeting many of the SDGs, compared to larger firms. Support measures include actions to help the most-advanced firms in terms of sustainability (SDG awards for frontrunners, new legal statuses for firms looking for a strong commitment device and export promotion policies for potential exporters), but also broader support for firms that are only starting their journey to sustainability.

• SDG awards to celebrate firms’ actions in the area of sustainable development are becoming increasingly common. SDG awards are found in Canada, Japan, and the European Union. These initiatives help raise awareness of consumers and fellow firms, communicate on good examples and provide more visibility to the award winners. However, even if most of these awards reserve special prizes for SMEs, SDG awards mostly go to frontrunners (rather than firms in the infancy of their strategies).

• Governments have also created new corporate entity statuses to support the transformation of business models, such as benefit corporation (United States), mission-oriented company (entreprise à mission, France) and società benefit (Italy). These statuses can provide firms with legal protection to balance financial and non-financial interests when making decisions, and serve as both a commitment and communication device to support their sustainability orientation.

• Export promotion policies related to SDGs, such as support to women entrepreneurs whose businesses have export potential (Costa Rica), innovationXchange (Australia) and matching seeds to needs by agencies such as the Japan International Cooperation Agency (JICA) and the Japan External Trade Organization (JETRO) (Japan), can support firms (particularly SMEs). These policies help in finding the right product markets, matching seeds (technologies and innovations) of domestic firms to sustainable development-related needs overseas. Firms may be unaware of the potential demand abroad and benefit from matching mechanisms.

• In addition, governments provide various toolkits, guidelines, resource centres, and sustainability reporting tools to support firms’ transformation of their daily operations into sustainable models, and to assist their related communication. For example, the Toolbox Human Rights (Belgium) provides a set of accessible tools to guide firms and their stakeholders in their human rights duties in the context of their daily business operations.1 The Women Entrepreneurship Knowledge Hub (Canada) and Greening Your Business web portal (Canada) function as a resource centre taking a more thematic perspective. The government of Colombia has developed a national online platform for sustainability reporting.2

Message 4: Policy packages differ across policy objectives, particularly in terms of the balance between mandatory compliance measures and rewards and incentives. This heterogeneity comes from different: levels of acceptance regarding the deviation from the social norm, time horizons for societal change, and links between the SDG and the core business of firms (Figure 3.8). SDGs for which deviation from the norm is not accepted (e.g. gender equality or workplace safety) include more mandatory compliance instruments (particularly regulations), even if some countries also provide rewards, incentives and assistance to support firms’ strategic in-house contributions to these objectives. Goals that can easily be linked to the core business of firms, or that have a more distant time horizon (e.g. health or energy) display more instruments supporting innovation in the related sectors. Conversely, for SDGs which are more pervasive and diffuse across firms (e.g. GHG emissions, gender equality), policy instruments include a higher share of government assistance and mandatory compliance policies:

• Health, well-being and safety-related SDGs. While there exist regulatory measures (e.g. Health and Safety at Work Acts) on the private sector’s daily operation side, financial incentives for firms’ R&D and innovation activities are commonly found, with the objective to support firms whose core business directly addresses health-related societal challenges.

• Equity-related SDGs. Mandatory compliance measures constitute the bulk of the instruments supporting gender equality in the workplace (e.g. equal pay acts and acts on Equal Participation of Women and Men in Leadership Positions in the Private and Public Sectors – Germany). Interestingly, some countries provide rewards, incentives and assistance for entrepreneurship and innovation targeting women, such as the EU Prize for Women Innovators, the Women Entrepreneurship Strategy (Canada) or the National Agency for Women Start-ups Activities and Services (BGA) (Germany). Others use public procurement as an incentive for firms to pursue gender equality such as Eruboshi certification (Japan).

• Environment-related SDGs. Both innovation policies and mandatory compliance measures play an important role. Innovation policies, such as the Green Innovation Funding (Canada) and the Sustainable Farming Fund projects (New Zealand), promote the firms’ innovation activities by providing financial support. Mandatory compliance measures include both regulations and carbon pricing instruments such as energy taxes and emissions trading systems in many countries.

Message 5: Many mandatory compliance measures were recently introduced or are currently under discussion. The number of mandatory and voluntary compliance instruments on non-financial disclosure, particularly sustainability reporting provisions that often target large and listed firms, has been increasing, especially in financial services and heavy industries (Van der Lugt, Van de Wijs and Petrovics, 2020[22]). In terms of non-financial disclosure, the European Union has introduced Directive 2014/95/EU for large firms. Due-diligence requirements are also gaining traction domestically, for example the Australian Modern Slavery Act 2018 (No. 153, 2018), the UK Modern Slavery Act 2015 (2015 c.30), the French Act no. 2017-399 on the duty of vigilance of parent companies and instructing undertakings and the German Act on Corporate Due Diligence in Supply Chains passed in June 2021. The United Kingdom is also considering deforestation due-diligence law. A significant number of rewards and incentives, and government assistance measures, have also been enacted recently. However, it is difficult to assess whether these schemes replace older ones or are completely new. Hence, this policy benchmarking exercise, which is not meant to study the evolution of policies over time, does not allow for distinguishing between a general rise in the number of SDG-related industrial policies and a shift towards mandatory compliance measures.