Industrial Policy for the Sustainable Development Goals

Executive summary

Firms should consider sustainability shifts as an intangible investment

The private sector has a significant role to play in the achievement of the Sustainable Development Goals (SDGs), along with other stakeholders. Firms are well placed to contribute to social goods by inventing new products, reducing negative externalities and by being channels for positive cross-border impacts.

Numerous firms consider it economically viable to develop sustainable products and services linked to their core business. As the SDGs draw more and more attention, this course of action may expand both business opportunities for companies and value added for society. Selected examples and survey data show that firms of all size categories can find a business case for aligning their core business with the SDGs. In fact, sustainability shifts can be understood as an intangible investment, complementary to other types of tangible and intangible capital.

However, the private sector’s contributions remain insufficient to achieve the SDGs by 2030. The tensions between financial and sustainability objectives hamper firms’ sustainability undertakings, leaving room for policy interventions to foster contributions to the SDGs.

Even among frontrunners, SDG actions differ widely across countries, sectors and firm size. The latter is found to be a major determinant of actions, development of SDG-related products and target setting. As for other types of intangible, small firms may be at a disadvantage compared to large firms in the transition to sustainability. Survey data also show that SDGs 3, 5, 8, 9, 12 and 13 are the most prioritised by firms, though not necessarily linked to their core business.

Sound policies for the SDGs require an effort on the measurement of firms’ awareness, actions and impacts

The measurement of firms’ awareness, actions and impact on the SDGs remains challenging, despite many initiatives aimed at providing a sustainability reporting framework for societal and environmental impacts.

This book contributes to this endeavour by offering several methodological contributions and providing new insights on firms’ contributions to the SDGs. To promote a more systematic analysis of firms’ actions, it presents a machine learning algorithm which automatically identifies the SDGs in a short text, trained on a set of around 6 000 labelled examples of firms’ sustainability actions. This algorithm is applied to classifications of economic activities and products and allows the identification of the sectors whose core business is related to the SDGs.

The private sector has the potential to contribute to a wide range of SDGs. Using the aforementioned algorithm, a significant share of value added can be linked to SDG 9 and, to a lesser extent, to SDGs 2, 3, 8, 11 and 12. These results are confirmed when examining exports, with SDG 2 and 7 also being related to a non-negligible share of exported goods.

But firms’ contributions to the SDGs are cross-sectoral and international in nature. Taking into account these linkages is of utmost importance when designing industrial policies for the SDGs. With the rise of global value chains (GVCs) in the last decades, firms’ impact has to be assessed at the global level, taking into account networks of cross-border suppliers and customers. The OECD’s Inter-Country Input-Output (ICIO) infrastructure allows uncovering the cross-border impacts of economic activities on SDGs. Focusing on four SDG indicators linked to the SDG framework, this book underlines potential impacts of the private sector.

On intersectoral linkages, the importance of upstream sectors in the attainment of the SDGs and the need for a whole-of-value-chain approach are highlighted. SDG-related activities rely on a network of domestic upstream suppliers, whose value added can account for up to 80% of that of SDG-related activities.

International trade provides opportunities for sustainable firms to contribute to the SDGs in other countries.

• The analysis reveals significant heterogeneity across countries, in terms of value added and exports linked to each SDG, pointing to strengths and gaps at the national level, but also shedding light on the potential for mutually beneficial trade at the international level.

• International trade takes a prominent role, and a country’s final demand for SDG-related activities often relies to a significant extent on foreign value added.

Key recommendations

Industrial policies (including innovation and general business framework policies) can foster the contribution of firms to the SDGs through their core business. To that end, governments rely on a diverse set of policy instruments, justified by the multifaceted challenge of the SDGs. This requires an integrated approach to articulate them:

• Regulations and taxes are key components of policy packages, but they need to be complemented with other types of policies as well. They may fall short when it comes to stimulating the innovation required to develop the new technologies and solutions needed to overcome the global challenges.

• In particular, the development of innovative solutions to global challenges requires a vibrant ecosystem, relying on many start-ups and entrepreneurs. Fostering the creation of innovative sustainable firms can be an effective tool to promote the contribution of the private sector to the SDGs through their core business.

• More generally, support to firms, and especially to small and medium-sized enterprises, is needed to trigger the transition to sustainable business models, as the process entails significant costs and risks.

• Beyond core industrial policies, adequate business framework conditions are needed. The advent of a sustainable economy will necessitate a significant reallocation of resources towards more sustainable activities and firms. In particular, international trade – when associated with a level playing field on sustainability issues – can contribute to the SDGs by increasing the market size for sustainable firms. Finally, demand-side instruments may also be useful to create new markets for sustainable products and services.

• Mission-oriented industrial strategies provide an appropriate structure for consistently articulating policy instruments and establishing suitable governance. To limit the risks of policy capture, emphasis should be placed on the inclusion of all types of firms (including young and small ones), policy evaluation and regular refit.