ESG and UK Public Procurement: Carbon Reduction Requirements

As part of national plans to cut carbon emissions, the UK Cabinet Office released a Procurement Policy Note on 5 June 2021 (“PPN 06/21“, or the “PPN“): this mandates the assessment of Carbon Reduction Plans by UK central government departments as part of the procurement of large public contracts.

Key aspects of the Public Procurement Notice

• UK Procurement Policy Note 06/21 requires a bidder for large public contracts (exceeding £5 million per annum) to produce a Carbon Reduction Plan (CRP) setting out how it intends to achieve ‘net zero’ carbon emissions by the year 2050 (compared to 1990 levels).
• This relates to regulated contracts for goods, services and/or works awarded by UK central government departments, their executive agencies and non-departmental public bodies.
• This will apply to procurement processes 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.

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:

1. immediately consider how they will meet the new requirements of PPN 06/21; and
2. prepare to implement a CRP with procedures for annual review (if not already in place).

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 such agreement or system is greater than £5 million per year (excluding VAT).

Bidders will be required to provide a CRP (a template is provided with the PPN) confirming their respective commitment to achieving ‘net zero’ by 2050 in the UK.  The CRP should also set out the bidder’s current environmental management measures, to be utilised during contract performance.

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 commitment to achieving ‘net zero’ by 2050 for UK operations;
• Providing current emissions for Scope 1 and 2 emissions of the Greenhouse Gas Protocol (the “GHG Protocol”: for the Scope 1 and 2 inventory, see here); and a defined subset of five 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 Protocol [1];
• Setting out current environmental management measures; for example, certification schemes or specific carbon reduction measures – the expectation being that these will be applied during contract performance and that they support achieving ‘net zero’ by 2050; and
• Publishing the CRP on the bidder’s website.

The ‘technical standard’ for compiling a CRP requires the bidder to include its current carbon footprint.  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 may require some new and onerous data collection steps to capture emissions (e.g. related to employee commuting, upstream / downstream transportation and distribution).

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

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. The PPN acknowledges, however, that the requirements are likely to be relevant for the majority of contracts that meet the financial threshold.

Sustained promotion of environmental, social and governance (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 steps to tackle climate change and reduce waste (as well as other factors);
• PPN 06/20 (Taking account of social value), which requires key ESG factors 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 procurement 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.

As noted above, PPN 06/20 requires the evaluation of key ESG themes in all UK central government procurement from 1 January 2021.  However, whereas this 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).

For more of our coverage of Business and Human Rights issues is here.

[1] These are Carbon dioxide (CO2), Methane (CH4), Nitrous Oxide (N2O), Hydrofluorocarbons (HFCs), Perfluorocarbons (PFCs), and Sulphur Hexafluoride (SF6).

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