By Simon Taylor, Partner at Forensic Risk Alliance.
On World Environment Day, the UK Government made a significant announcement in the Green procurement agenda by introducing a new requirement for government suppliers to commit to the UK’s net zero target. The Procurement Policy Note (“PPN”) released on 5 June 2021, sets out that all businesses bidding for government contracts for services, works or goods, with annual value above GBP 5m must publish a Carbon Reduction Plan (“CRP”) within which they commit to net zero emissions by 2050 and detail clear and credible carbon reduction plans. Importantly, a valid CRP must now include not only direct and indirect emissions from owned or controlled activities (known as Scope 1 and 2 emissions) but also emissions relating to the whole of the value chain (Scope 3 emissions).
The UK Government aims to use its power with the circa GBP 290bn spent on procurement each year to transform the UK economy to net zero and meet its Net Zero 2050 target.
Who will be affected?
This requirement will be mandatory for all companies bidding for government contracts, not just those that are successful in winning, and is required for all Central Government Departments, their Executive Agencies and Non Departmental Public Bodies. Any company that fails to comply will be excluded from the bidding process.
The UK Government expects the PPN requirement to apply to the majority of contracts with very few exceptions. At present, there is no guidance on what those exceptions will be, if any.
What are the new requirements?
The CRP must meet the following required standards:
- Confirmation of commitment to achieving Net Zero by 2050 for UK operations;
- Baseline emissions footprint as a reference point against emissions reduction can be measured;
- Current emissions reporting for Scope 1, Scope 2 and a subset of Scope 3 (value chain) emissions;
- Emission reduction targets completed or implemented since baseline, plus future additional measures;
- Carbon reduction projects, to be applied when performing the contract;
- Reporting on the six greenhouse gases covered by the Kyoto Protocol on climate change, not just carbon dioxide;
- Publication of the CRP, with clear signposting, on the supplier’s UK website;
- Approval by Board of Directors (or equivalent senior leadership) to demonstrate commitment at the highest level; and
- Updated regularly, at minimum annually.
What is the timeline?
Any company that would like to bid for government contracts on or after 30 September 2021 will be required to fulfil this requirement by providing a CRP.
What should companies be doing?
Companies wishing to participate in public procurement need to start preparing a CRP that defines where emissions come from and what environmental measures are in place to reduce or offset these. The CRP must confirm commitment to Net Zero by 2050 for UK operations and back that up with actions that will achieve this.
Reporting on emissions is not a new task, however most current reporting is limited to Scope 1 and Scope 2 emissions. The new requirement also includes the reporting of a subset of Scope 3 emissions, including business travel, employee commuting and up / downstream transportation and distribution, which is likely to require significantly more work. Companies need to act now to ensure sufficient time to prepare this prior to 30 September 2021, and draw up plans for the continual update of their CRPs.
What are the implications?
CRPs need to be submitted at the selection stage of bidding for government contracts and will be evaluated as part of the selection process. Whilst more detailed guidance is awaited, it is likely that those organisations able to move more rapidly towards net zero and who can provide credible plans will be at an advantage.
Additionally, given UK Government commitments to net zero, we also anticipate more comprehensive auditing and tracking of climate commitments contained in CRPs during the life of the contract to ensure continuing compliance. Firms should prepare for audits or testing by developing robust internal controls for the collection and reporting of data relating to promises made in their CRPs.
We also predict that that firms will need to prepare for and manage the risks arising from the new transparency requirements for CRPs. There is a strong appetite in investigative journalists and amongst activist groups for calling out inconsistencies and discrepancies in environmental claims, which can lead to significant reputational issues.
What is the wider context?
The UK Government’s move in public procurement is just one part of a wider wave of measures relating to ESG commitments and reporting which continues to put these issues to the top of the corporate agenda. Together, these measures will be necessary in order for the UK Government to achieve net zero by 2050.
The context for the UK’s current move goes back as far as 2008 when the European Union recommended the creation of a process for setting common Green Public Procurement (“GPP”) criteria. Since then, the Commission has developed more than 20 common GPP criteria, and along with some European countries, has developed guidance for GPP. Many public authorities in the EU are implementing GPP notwithstanding that the guidance remains voluntary. With the continuing focus on the environment and wider ESG issues, we would expect the status of measures like GPP to transition to mandatory rules in the near future. As well as the EU, there are also already ESG factors in public procurement rules in other jurisdictions such as USA, Australia, China and Japan.
These public procurement measures also link into the 2019 European Green Deal, a plan which if successfully implemented will result in Europe becoming the first climate-neutral continent. At a high level the Green Deal covers:
- no net emissions of greenhouse gases by 2050;
- economic growth decoupled from resource use; and
- no person and no place left behind.
As part of the European Green Deal, the European Commission recently announced the ‘Fit for 55’ climate package in July 2021, aiming for a 55% net reduction in emissions by 2030. This contains a comprehensive suite of measures covering areas, such as transport, land and infrastructure.
Green procurement at a public sector level will inevitably act as a catalyst for corporates to re-double efforts to ensure that sustainability and other ESG topics are adequately incorporated into procurement strategies. Additionally, with the European Commission announcing a new Corporate Sustainability Reporting Directive, which will to mandate the comprehensive reporting and audit of ESG metrics [see FRA article LINK covering this in more detail], weaknesses in sustainability or other ESG issues within supply chains will be exposed.
Although the Green procurement agenda has been around since at least 2008 it is only relatively recently that concrete and irreversible shifts have been made. The latest of these is the UK’s PPN and the requirement for those bidding for government contracts to commit to net zero by 2050 and produce a credible plan that shows how this is possible. Other countries are also on this path and it cannot be long before public procurement becomes Green in most developed economies. These geo-political moves are cascading to the activities of corporates who need to ensure both that their supply chains are Green and that they have the data to be able to report metric accurately and in compliance with emerging reporting requirements.
Green procurement is only one part of the many developments across the ESG agenda continue to accelerate and this is only likely to increase as governments vie for ESG superiority in the run up to the COP26 conference in Glasgow in November 2021. All companies, whether they rely on government contracts or not, need to be prepared for the shift to sustainable economies and the requirements of transparency, disclosure and accountability that go with this.