This study explores the role of innovation in local public administration across Europe, emphasising its impact on fostering sustainable development, inclusivity, and citizen engagement. Anchored in the Erasmus+ INNLocal project, the research benchmarks exemplary practices in three key dimensions: environmental sustainability, diversity and inclusion, and citizenship participation. Using a mixed-methods approach, including data collection from the Observatory of Public Sector Innovation (OPSI) and direct engagement with municipalities, 36 best practices were analysed, showcasing diverse strategies for addressing contemporary challenges. Findings reveal that environmental sustainability initiatives, such as efficient waste management, renewable energy integration, and green infrastructure projects, are prevalent. The study underscores the need for local governments to adopt systematic policies that embed environmental sustainability, inclusivity, and citizen engagement in their governance frameworks. Recommendations include fostering cross-sector collaboration, leveraging digital transformation for broader impact, and institutionalising benchmarking to adapt practices dynamically. Training and capacity building are also emphasised as critical for sustaining innovation. This research has significant implications, providing actionable strategies for municipalities to enhance service delivery and citizen engagement. Socially, the findings advocate for inclusive and participatory practices that empower communities and reduce disparities. By emphasising innovation’s transformative potential, the study contributes to the ongoing discourse on modernising public administration to address pressing global and local challenges effectively.