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Kate Gough and Elizabeth Forster are specialist procurement lawyers at Freshfields Bruckhaus Deringer LLP, an international law firm, with experience advising governments and contractors across the globe on public procurement and on court challenges to procurement decisions. In this blog, they explain the UK Government’s latest measure designed to use the “power of the purse” to advance its climate change agenda and the implications for contractors and contracting authorities.

Last year, the UK Cabinet Office published new rules contained in Public Policy Note 06/21 (the Rules), that require central government departments, executive agencies, or non-departmental public bodies (In-Scope Organisations) to incorporate sustainability policies when reviewing tenders for major contracts.

As discussed in last November’s Oxford Procurement of Government Outcomes (POGO) session on sustainable procurement, these Rules are the latest example of the UK Government’s willingness to use the £290 billion spent annually through public procurement processes to advance broader policy objectives (having for example previously introduced measures aimed at eradicating modern slavery in government supply chains or maximising social value in procurement). The UK Government is not alone in this respect, with an increasing number of governments and international organisations such as the World Bank recognising the role procurement can play in driving sustainability goals (see for example the latter’s ‘Sustainable Procurement’ Guidance).

The Rules require In-Scope Organisations to ensure that for all contracts worth more than £5 million (excluding VAT), bidders must commit to reaching Net Zero by 2050. Additionally, bidders must provide a Carbon Reduction Plan (in the form set out in the Rules). Among other things, these Carbon Reduction Plans must:

  • confirm the bidder’s commitment to achieving Net Zero by 2050 in the UK;
  • set out “the environmental management measures in effect, including certification schemes or specific carbon reductions measures” that will apply when the bidder is performing the contract;
  • set out the bidder’s “baseline emissions footprint” i.e. the greenhouse gases produced prior to the introduction of any strategies to reduce emissions;
  • be approved by a director (or equivalent); and
  • be published on the bidder’s website and updated regularly (at least annually).

Impact of the Rules

The new Rules are a notable step in the Government’s ambitious commitment to achieve Net Zero by 2050. The PPN emphasises that “environmental consideration and carbon reduction will be a factor in most, if not all, contracts”, suggesting that Net Zero considerations are intended to become firmly embedded in public procurement processes.

These Rules are not the first carbon emission obligations placed on large companies; under the Streamlined Energy and Carbon Reporting Regulations 2018 (SECRR 2018) many large businesses are already required to report on their greenhouse gas emissions. However, PPN 06/21 goes further by requiring a commitment to achieve Net Zero emissions by 2050 and the reporting of some “Scope 3 (indirect) emissions”, including business travel, employee commuting, transporting, distribution and waste for the first time.

However, the Rules have been met with some criticism, both by contractors unsure as to how they will operate in practice, and more widely by those who doubt that they will catalyse a significant change in behaviour among government contractors. In particular, concerns have been raised that the Rules won’t cover smaller contracts, that they do not cover all Scope 3 emissions (which represent the bulk of emissions for many businesses), and more generally, that the 2050 target is too far away.

These concerns are understandable: the PPN alone is unlikely to generate radical change in how large companies approach carbon emissions. Indeed, there is a risk that some will see it as a ‘box-ticking’ exercise, given that the focus is on producing a carbon reduction plan, rather than the quality of the plan. However, given the UK Government’s recognition of the role of public procurement in its Net Zero strategy, it is likely that the Rules will be the first of a number of sustainability-related procurement measures to be introduced, and that future initiatives may have a greater impact on government contractors. It is possible that the UK Government will take inspiration from procurement policies in other jurisdictions, such as the German Government’s “AVV Klima” that prohibits public bodies from purchasing certain non-sustainable products.

The Rules are also likely to have a knock-on effect throughout the supply chain: subcontractors and suppliers for government contractors, in particular, are likely to come under scrutiny for the impact they will have on the company’s carbon emissions, with ‘high emitting’ entities at risk of becoming less and less attractive business partners. The Government has acknowledged that there will be a teething phase in which suppliers and In-Scope Organisations get to grips with the Rules, and we expect that more detailed guidance will be published at some point in the future. In the meantime, the Government has urged companies to align with the spirit of the policy and immediately start (or continue) thinking about their carbon impact and mitigation measures.

Next steps for Contractors and contracting authorities

Many large companies will already be prepared to report on their emissions in light of the SECRR 2018 and have already made public commitments to achieve Net Zero (often sooner than 2050). For these companies, the key concern will be to ensure that existing commitments and reporting are appropriately demonstrated in their Carbon Reduction Plan.

Meanwhile, companies wishing to bid for large public contracts that have not already made such commitments or are not already reporting their emissions should start collating relevant information as quickly as possible in order to ensure that they have a Carbon Reduction Plan in place, approved at an appropriate level of seniority, in time to participate in the tender process.

In order for the PPN to be effective, In-Scope Organisations will need to ensure that they have adequate guidance, resources and technical capacity to assess Carbon Reduction Plans, to identify carbon intensive procurement contracts and to better understand where emissions savings could be made. Once the ‘teething’ issues have been addressed, there may be scope for more ambitious incentives, such as schemes to reward contractors that demonstrate marked improvement in their carbon emissions.