ESG in UK public procurement: taking social value seriously

Summary:

• Procurement Policy Note ("PPN") 06/20 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.
• This applies to all contracts awarded by UK central government departments, their executive agencies and non-departmental public bodies that are regulated by the Public Contracts Regulations 2015 ("PCRs 2015").
• Prospective bidders must evaluate the extent to which they can deliver the stated ESG objectives in each procurement:
  • bidders unable to demonstrate or verify ESG elements when submitting tenders will face significant disadvantages when competing for public contracts awarded by UK central government given the significant weight (at least 10%) which will be afforded to such factors; and
  • bidders that exaggerate or misrepresent their existing ESG credentials may be subject to severe penalties under the PCRs 2015, including potentially exclusion from relevant tender processes for three years.
• PPN 06/20 complements – and (arguably) even goes further than – global legislative efforts to promote greater ESG monitoring and compliance within private organisations, especially when bidding for public contracts.

Promoting ESG values in public procurement: PPN 06/20

In September 2020, the UK Government published 'PPN 06/20 - taking account of social value in the award of central government contracts': this seeks to promote ESG values through procurement processes conducted by central government.

In these uncertain times, it is not uncommon to see another PPN proposing a major shift in the UK procurement landscape.  However, unlike other PPNs relating to short-term responses to the COVID-19 crisis, PPN 06/20 (in addition to addressing COVID-19 recovery) points towards lasting and systemic change to the assessment of tenders under the UK public procurement regime.

The 'social value model' in PPN 06/20 is divided into five broad themes, each containing one or more policy outcomes to be achieved that must be evaluated expressly through specific ESG objectives:

1. COVID-19 recovery

• Help local communities to manage and recover from the impact of COVID-19

2. Tackling economic inequality

• Create new businesses, new jobs and new skills
• Increase supply chain resilience and capacity

3. Fighting climate change

• Effective stewardship of the environment

4. Equal opportunity

• Reduce the disability employment gap
• Tackle workforce inequality

5. Wellbeing

• Improve health and wellbeing
• Improve community integration

Detailed guidance on the precise application of the social value model will be issued in due course, which is to be welcomed given the high-level nature of PPN 06/20.

PPN 06/20 sits alongside and reinforces a number of other UK legislative and policy initiatives (including the PCRs 2015 themselves) to promote ESG values, including:

• PPN 09/16 – Procuring Growth Balanced Scorecard
  PPN 09/16 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 (so-called) 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.
• Public Services (Social Value) Act 2012 ("PSSVA 2012")
  The PSSVA 2012 mandates all UK contracting authorities (i.e. not limited to central government) to "consider" at the pre-tender stage how the procurement may improve relevant social, environmental and economic well-being, how such improvement might be secured and whether a consultation is required.¹  However, as acknowledged in PPN 06/20 itself, this legislative obligation merely to consider such objectives may not yield meaningful results absent a stricter requirement such as that required by the social value model.

The 'social value model' forms part of the UK Government's review of ESG in government procurement; it launched a consultation in March 2019 and published its response on 24 September 2020.  Given that most of the 245 respondents to the consultation were VCSEs and SMEs, it is perhaps not surprising that 46% of respondents expressed concern that the new social value framework may create barriers to bidding, particularly for SMEs and VCSEs.  The UK Government has responded by committing to a "comprehensive training programme" and to publishing guidance on:

• ensuring a consistent approach is taken throughout central government procurement;
• evaluating the qualitative nature of social value, rather than purely on volume or quantity;
• ensuring metrics are clearly linked to bidders’ proposals for a particular contract rather than general corporate policies; and
• structuring procurement to enable consortia bidding and engagement with mutuals / charities.

Potential effects on suppliers – comply to compete

PPN 06/20 therefore reflects a more prescriptive approach from a government seeking to drive a sea-change in how both contracting authorities and private entities approach public procurement: it prescribes a minimum weighting of 10% out of the total score in the procurement to be attributed to ESG objectives, and expressly allows contracting authorities to go further where justified.  Given the broad scope of the policy outcomes set out in the social value model, the relevant UK contracting authorities are clearly being afforded a wide discretion to justify higher weightings if they so desire.

Accordingly, PPN 06/20 places suppliers that are unable or fail to demonstrate compliance with the outcomes and objectives mandated by the social value model at a significant competitive disadvantage: given that a contracting authority's decision to award a public contract to one particular supplier rather than another might be determined by a fraction of a percentage difference in those suppliers' respective scores, a 10% weighting is already a substantial differentiator.  Accordingly, the PPN represents a classic "nudge" for suppliers to have sufficient measures in place to ensure both compliance with and delivery of the ESG objectives before they can be in a position to submit credible bids for such public contracts.

Moreover, any suppliers presenting their social value credentials to contracting authorities must be mindful of the severe penalties prescribed by the PCRs 2015 for misrepresentation.²  Under the discretionary exclusions in the PCRs 2015, UK contracting authorities may exclude such suppliers from relevant tender processes for three years,³ and those suppliers would then need to expend time and resources to “self-clean” if they wished to participate again.⁴

Suppliers should therefore consider carefully whether statements concerning their abilities to deliver on the social value model can be substantiated and verified during the procurement process. 

Public procurement as part of the broader ESG landscape

PPN 06/20 is a further manifestation of the marked shift in recent years towards greater promotion, measurement and assessment of ESG factors within corporate culture. 

Rather ironically as the Brexit transition period under the EU-UK Withdrawal Agreement draws to a close, PPN 06/20 is very much in line with a number of European Commission policy objectives.  In particular, the recent European Green Deal contains several legislative and policy initiatives to promote what are primarily environmental factors in public procurement – for example:⁵

• Proposing minimum mandatory green criteria / targets for public procurement in sectoral initiatives, EU funding or product-specific legislation "[to] ‘de facto’ set a common definition of what a ‘green purchase’ is, allowing collection of comparable data from public buyers, and setting the basis for assessing the impact of green public procurements"; and
• Building on previous EU policy initiatives such as 'Green Public Procurement', which publishes and promotes green procurement criteria across a number of sectors and provides a toolkit of green procurement practices for contracting authorities.

Whilst current EU policy in respect of public procurement seems to be concerned primarily with promotion of environmental policies (the European Green Deal is being promoted as part of the EU's sustainable response to the COVID-19 crisis), PPN 06/20 goes further in addressing the arguably trickier "S" element of ESG, through its focus on promotion of social value in public procurement.  For the time being, at least, it seems that the UK Government is pushing somewhat ahead of others in this area.  Whether this drive will translate into meaningful corporate change throughout procurement supply chains and demonstrable "value" in local communities remains to be seen – as above, corporate entities must be careful to avoid overstating their capabilities.

The legislative approach across the ESG spectrum is also becoming broadly consistent – rather than imposing measures directly on the private sector, public bodies are required to enforce higher standards indirectly.  In short, non-compliant private organisations will simply no longer be able to compete for potentially lucrative public contracts without demonstrating ESG compliance. Tougher scrutiny has been proposed already in several related areas, both within the UK and further afield, including:

• Modern slavery – Reforms to the Modern Slavery Act 2015 will not only see the introduction of a civil penalty regime for non-compliance, but will also require certain public bodies to report on steps taken to prevent modern slavery in their supply chains. Such obligations will see closer scrutiny of bidders' supply chain operations and compliance measures prior to contract award (see our assessment of the reforms here); and
• Human rights and the environment – The European Commission wishes to introduce legislation by 2021 requiring companies operating in the EU to carry out human rights and environmental due diligence on their operations.Such proposals will sit alongside other globally-accepted standards promoted by the United Nations and the OECD. The European Parliament recently issued strong calls for an enforcement mechanism to compel compliance in this area (see our assessment of the proposals here and here).

The approach of the UK Government – in terms of not only aligning with, but also (arguably) building further upon, such global efforts – is to be welcomed, especially in the light of the UK's recent accession to the WTO's Government Procurement Agreement ("GPA"), with effect from 1 January 2021.  The 'mood music' – from the EU in particular – suggests the direction of travel is increasingly towards promoting social value / ESG factors in public procurement.  If UK companies wish to continue to compete for public contracts from 1 January 2021, they should be prepared to demonstrate and verify compliance with rigorous requirements in these areas.