Bidders for large UK public procurement contracts must commit to net zero by 2050

Other Author      Ross McKeown, Trainee Solictior

Summary

• UK Procurement Policy Note 06/21 requires bidders for large public procurement contracts (exceeding £5 million per annum) to produce Carbon Reduction Plans setting out how the organisation intends to achieve 'net zero' carbon emissions by the year 2050.
• This applies to regulated contracts for goods, services and/or works awarded by UK central government departments, their executive agencies and non-departmental public bodies.
• The PPN will apply where the procurement process is commenced on or after 30 September 2021 – bidders should take steps now to prepare for compliance, which might require new data collection and reporting procedures.

In April 2021, the UK Government announced plans to cut carbon emissions by 78% by 2035, as part of the longer-term agenda to achieve a minimum of 'net zero' carbon emissions compared to 1990 levels by 2050.  In this context, the UK Cabinet Office released a Procurement Policy Note on 5 June 2021 setting out how central government departments should require and assess Carbon Reduction Plans of bidders at the selection phase of the procurement process for large contracts (the "PPN 06/21", or the "PPN").

How does PPN 06/21 work?

The PPN introduces a new (mandatory) selection criterion against which bidders will be assessed: it will apply to the procurement of goods, services and/or works with an anticipated contract value greater than £5 million per year (excluding VAT), advertised on or after 30 September 2021.  The PPN will also apply to framework agreements and dynamic purchasing systems where it is anticipated that the individual value of any contract to be awarded under any such agreement or system is greater than £5 million per year (excluding VAT).

Bidders will be required to provide a Carbon Reduction Plan ("CRP") (a template is provided with the PPN), confirming the supplier's commitment to achieving 'net zero' by 2050 in the UK.  This should also set out the environmental management measures that the bidder has in place, which will be in effect and utilised during the performance of the contract.

Key practical considerations

The CRPs must meet the standard required by the PPN, and guidance on how to do so has been published here.  Steps that bidders need to be able to demonstrate or comply with include:

• Confirming the bidder's commitment to achieving 'net zero' by 2050 for their UK operations;
• Providing current emissions for the sources included in Scope 1 and 2 of the Greenhouse Gas Protocol (the "GHG Protocol": for the Scope 1 and 2 inventory, see here) and a defined subset of five of any of the Scope 3 emissions from the GHG Protocol;
• Providing emissions reporting in Carbon Dioxide Equivalent for the six greenhouse gases covered by the Kyoto Protocol¹;
• Setting out environmental management measures in effect: examples given are certification schemes or specific carbon reduction measures adopted by the bidder – an expectation is added that the bidder will be able to apply these when performing the contract and that they support achieving 'net zero' by 2050; and
• Publishing the CRP on the bidder's website.

The CRP does not replace existing reporting or calculation of the organisation's carbon footprint. However, the 'technical standard' for compiling a CRP requires the bidder to include its current carbon footprint and commitment to achieving 'net zero' carbon emissions by 2050.  For complex procurements (e.g. those involving multiple parties in a consortium), all parties must complete a CRP, and parties will need to consider carefully the allocation of liability for verification and reliance on others' data when submitting a bid.

Neither is this a 'one shot' compliance hurdle for bidders. It is expected that the CRPs will be reviewed and updated annually (and within six months of financial year end) to reflect changes to an organisation's structure and to take account of efforts to reduce emissions over time.  Indeed, the PPN anticipates that contracting authorities may verify that the supplier remains committed to achieving 'net zero' by 2050 prior to entering into any further call-off contracts awarded under a framework agreement.

Importantly, there is a carve out available to contracting authorities where a commitment to 'net zero' would not be related or proportionate to the contract. Although the PPN acknowledges that the requirements are likely to be relevant for the majority of contracts that meet the valuation threshold, clearly there is an expectation that some contracts will escape the compliance burden.  The PPN Guidance provides two (non-exhaustive) examples, though it remains to be seen what further justifications could emerge:

• "where the market for a contract is distorted/narrowed/struggling to such a significant extent that delivery of public services is likely put at risk, or value for money is likely to be severely compromised"; and
• "where there is a civil emergency".

In completing a CRP, bidders are required to detail their emissions for (at least) five of 15 categories of scope 3 emissions detailed in the GHG Protocol.  The categories are expansive and compliance may require some new and onerous data collection steps to be implemented to capture emissions (e.g. for those related to employee commuting, and upstream and downstream transportation and distribution).

Following the GHG Protocol's Corporate Standard, a bidder will, in its CRP, be required to report on all sources of carbon emissions over which it has financial or operational control, and according to its share of equity in the operation. The measures also apply equally to non-UK suppliers, albeit only to their respective UK operations.

Sustained promotion of ESG values in public procurement

PPN 06/21 sits alongside and reinforces a number of other recent UK legislative and policy initiatives to promote ESG values, including:

• PPN 05/21 (National Procurement Policy Statement), which requires all contracting authorities to ensure that their respective procurement strategies take into consideration how to tackle climate change and reduce waste, among other things;
• PPN 06/20 (Taking account of social value), which requires key environmental, social and governance ("ESG") related themes to be evaluated expressly in all UK central government procurement from 1 January 2021, through the use of a 'social value model'. A minimum weighting of 10% must be given to ESG objectives in each procurement (see our commentary here); and
• PPN 09/16 (Procuring for growth balanced scorecard), which applies to all UK central government construction, infrastructure and capital investment procurements valued over £10m. It encourages contracting authorities to assess strategic themes and critical success factors – many of which echo the social value considerations of PPN 06/20 – while also encouraging participation by SMEs and Voluntary, Community and Social Enterprise Organisations ("VCSEs").The UK Government's guidance on the model Balanced Scorecard will be updated to reflect the social value model established by PPN 06/20.

As noted above, the social value model introduced by PPN 06/20 requires the evaluation of key ESG themes in all UK central government procurement from 1 January 2021.  However, whereas the social value model is applied at the evaluation stage (i.e. focussing on the bid), PPN 06/21 will be applied at the earlier selection stage (i.e. focussing on the bidder).  PPN 06/21 seems therefore to blur the distinction between selection and evaluation stages, promoting environmental concerns throughout the whole procurement.  Whether there will also be a greater focus on S(ocial) and G(overnance) factors at the earlier selection phase remains to be seen (e.g. regarding modern slavery commitments, business and human rights reporting obligations).

Action plan

Organisations likely to be bidding for large public procurement contracts (in excess of £5 million per annum) on or after 30 September 2021 should immediately consider how they will meet the new requirements of PPN 06/21, and prepare to implement a CRP with procedures for annual review (if not already in place).

Related measures

PPN 06/21 is part of a suite of measures that the UK Government is introducing in order to help achieve carbon neutrality.  Streamlined Energy and Carbon Reporting requirements have been in place for some time (see here).  Further, the UK Government is proposing to roll out disclosure obligations in line with the Taskforce on Climate-Related Financial Disclosures ("TCFD") (see here).   In November 2020, a cross-Whitehall and regulator taskforce published an Interim Report and Roadmap, setting an indicative timeline for when commercial companies and financial services firms should expect to begin reporting against the TCFD’s recommendations.  

The FCA has focused initially on introducing TCFD-aligned disclosure rules for premium listed companies.  However, the FCA is now consulting on new TCFD-aligned disclosure rules for:  

• asset managers 
• life insurers 
• FCA-regulated pension schemes 

For more insights from our 'Eye on ESG' blog, please click here.