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Slow Views

Can the lure of big government deals nudge companies to cut emissions?

Thursday 19 August 2021

From September, businesses looking to secure deals that supply the most valuable goods and services to the government must have committed to Net Zero. It’s an imperfect, but valuable incentive for action

Public contracts aren’t sexy – but if you consider that the UK government spends over £290 billion every year on purchasing work, goods or services from companies most of us know little about, they suddenly become more intriguing.

This year, there have been changes to the rules around how companies get those deals, designed to improve transparency and help use the public purse for good. One key change will come into force in September.

What’s the policy?

On 5 June, World Environment Day, the Cabinet Office announced that businesses will have to align to UK sustainability goals to bid for major government contracts. 

From September, any business bidding for a public contract worth over £5 million per year and published by central government must pledge to achieve Net Zero by 2050, through a carbon reduction plan that details their carbon footprint and relevant environmental measures. 

The UK government is the first in the world to bring this kind of environmental criteria into such contracts. However, the rules won’t apply to contracts offered by devolved administrations, and don’t apply consistently across the whole of the public sector, either. Local governments and the NHS do not need to follow these guidelines. 

Is it a good idea?

Georg Neumann, Head of Communications at Open Contracting Partnership, a not-for-profit through which governments, businesses and civil society collaborate for open data in government contracting, believes that public procurement “can be a massive driver of Net Zero and the green energy revolution.”

He says that in theory this policy could be a powerful lever to deliver sustainability targets, but it “won’t be enough to change the course”. Ultimately, the policy will only be a success if companies follow through on their stated plans with action to cut their emissions. 

“The policy provides enough ambiguity to risk having only a limited immediate impact. The publication requirements for the policy itself are not designed to allow for easy access by decision-makers and the public to monitor actual supplier performance.”

Simon Geale, Executive Vice President of Proxima, a procurement and supply chain consultancy, said that while the policy “is not revolutionary, it is a logical first step.”

He added: “It signals much in the way of intent but perhaps doesn’t necessarily deliver huge amounts of on-the-ground, real, practical change.”

The main weakness, Geale says, lies in which emissions companies have to report. Scope 3 emissions, which include indirect emissions in a supply chain rather than emissions from sources the business controls (like company cars), or the energy it purchases (like heating), often represent the majority of an organisation’s total greenhouse gas (GHG) emissions. There are 15 categories within Scope 3, but the policy only considers a subset of five of them. 

It sounds… complicated

Contrary to what the Queen said in her May 2021 speech – that the “laws will simplify procurement in the public sector” – some of the policies introduced have actually complicated things more.

The additional criteria make assessing suppliers’ bids more complex, and it isn’t clear whether the teams tasked with doing so will have the right expertise to understand the new climate measures. Government might end up relying more on expensive external consultants.

The policy is definitely innovative and a step in the right direction, but can it really move the needle? 

How many contracts will be affected?

The number of contracts affected is very small, but their value is huge. According to Tussell, a data provider on UK public sector contracts and government spending, in 2020, less than five per cent of the contracts awarded by Central Government would have been over the £5 million per annum threshold, after which the new rules kick in. Just 526 of over 5,700 suppliers would have needed to act to comply with the new environmental requirements. However, this accounted for 83 per cent of the total value of contracts awarded last year.

One way to ensure impact would be to make the environmental measures binding in company contracts, so that they must be upheld if suppliers want to be paid. Otherwise “you will see quite a lot of greenwashing, because people want to signal that they are making progress but not many have yet made progress.”

If there is nobody holding companies accountable for their promises, the policy becomes merely a “ticking the box” exercise, defeating its original purpose. 

What about SMEs?

Since the £5 million threshold is high, small and medium enterprises (SMEs), who don’t usually bid for such large contracts, won’t be forced to meet the requirements and make a climate pledge. 

However, the change could still affect them. Stephen Henry, Founder of Positive Planet, a company that helps clients reduce their climate impact and obtain sustainability certifications, believes that the measures will start trickling down through the supply chain of the larger companies that are bidding for these contracts, and SMEs will be “forced by their customers to take actions.”

The issue is that the UK’s six million SMEs are not ready. According to a briefing by Bankers for Net Zero, the new policies will affect every business in the UK, but “99 per cent of British businesses are likely to be unprepared for burgeoning carbon reduction policy and regulation.” 

The report states that “neglecting SMEs puts one in four workers and 52 per cent of the UK’s turnover at risk of being left behind in the UK’s ‘Race to Zero’.”

Is this just a bad idea?

Despite its limitations, the policy is an incentive that could drive behavioural changes within businesses, and encourage commercial teams across the public sector to factor in sustainability when selecting who to work with.

Most companies do not currently track their carbon footprint, but if they want to do business with the public sector, those seeking the biggest contracts will need to embark on fundamental transformations in how they operate. They will need to generate and collect more data about their environmental impact across all of their activities, which will, in turn, lead to an increase in the available evidence about decarbonisation throughout government supply chains. 

Decarbonising business is no easy task but, with this policy, the UK is trying something different. If it drives change, other countries may follow suit.

Carla Rosch is a freelance journalist and Research and Press Lead at Tussell. She previously worked as a research analyst at McKinsey.