ESG and its relevance to the public sector

Peter Collins and Sydney Chandler discuss the growing importance of Environmental, Social, and Governance criteria in public procurement.

What is ESG?

Environmental, social and governance (ESG) – three standards used to indicate corporate cultural behaviour, and its impact on the environment. ESG is primarily used in the financial sector in that it aims to allow investors to measure sustainability, ethical and corporate matters to determine future performance of a company. However, as we will consider later in this article, it is becoming increasingly important for local and central government departments to run procurement exercises in line with ESG practices.

Whilst in many cases it may be difficult to perform well on one area without another, each standard is interdependent and covers a broad spectrum of topics. The environmental aspect looks at stewardship of the environment: for example, pollution, waste, greenhouse gas emissions, deforestation, and climate change. The social aspect considers how a company treats people, including its own employees and the wider public population, for example: diversity and inclusion, local community support, working conditions, and customers. Governance looks at company policies and how the company is governed: corruption, board diversity, company structure, and audits.

Legislative and regulatory requirements

Although there is no current overarching UK legislation on ESG, and therefore very little risk in not driving such issues, companies are becoming increasingly aware that good performance of ESG matters can be crucial in displaying business integrity. Both the public and private sector is now aware of the increasing importance now placed on the ability of a company to demonstrate that it is not simply complying with relevant requirements because it must, but because it has a true commitment to the issues beyond the scope of minimum compliance as set out in legislation or regulation.

There are however some specific requirements within domestic legislation covering particular ESG issues. Some examples include:

• The Modern Slavery Act 2015 requires companies with an annual turnover of £36 million to prepare an annual statement showing that modern slavery does not take place within its business or indeed its supply chain.
• The Equalities Act 2010 (Gender Pay Gap Information) Regulations 2017 (SI 2017/172) also addresses an ESG limb by requiring organisations with more than 250 employees to publish information on gender pay gaps on a yearly basis.

Additionally, there are a number of non-mandatory guidelines and projects that companies can choose to adopt should they be inclined to do so to further their ESG practices. A non-exhaustive list as follows:

• Carbon Disclosure Project
• Task Force on Climate Related Financial Disclosures (TCFD)
• Global Reporting Initiative
• UN Principles of Investment

Although much of the guidance remains non-mandatory, the UK Government is stepping up its efforts in shifting corporate responsibility by making non-mandatory guidelines mandatory. This is particularly so in respect of climate change issues. For example, the UK Government intends to require large companies to make climate-related disclosures in line with TCFD recommendations by 2025.

ESG and UK public procurement

Recently there has been a steep rise in public concern for the climate and environment. During the UK’s Presidency of COP26 it has been widely reported that the UK government intends to legislate on net zero by launching its mission to take its “green industrial revolution” global. It follows that local and central government will be very much at the forefront of this drive to meet net zero, and they will therefore likely be running increasingly more ESG conscious procurement exercises, by building upon existing public procurement requirements, arguably ahead of the legislative curve.

The UK Government published the Procurement Policy Note ‘PPN 06/20 – taking account of social value in the award of central governments’ in September 2020 which sought to propel systemic change with regards to the assessment and evaluation of tenders. It requires ESG related matters to be evaluated by all UK central government procurements from 1 January 2021 – through the ‘social value model’ – with a minimum weighting of 10% to be given to ESG practices. The ‘social value model’ in PPN 06/20 covers five areas, all of which cover ESG objectives, namely:

1. Covid-19 recovery. This considers how organisations can help manage and recover from the impact of the pandemic through, for example, training, employment, social distancing and additional covid measures in and outside of the workplace.
2. Tackling economic inequality. This aims to cover items such as support for new job opportunities, new businesses, or the use of innovative technologies such as AI development.
3. Fighting climate change. The outcome of this area is for a company to display stewardship of the environment. For example, the organisation might offer additional environmental benefits during the term of the contract by working towards net zero.
4. Equal opportunity. This area deals with improvement in the disability employment gap and general employment inequalities.
5. This focuses on the importance of improving health and wellbeing of employees and supporting community integration.

Although there is a minimum weighting of 10% towards ESG objectives, PPN 06/20 allows a contracting authority wide discretion in determining higher weightings as it sees appropriate. Therefore, the UK Government appear to have placed pressure on those organisations wishing to place bids for public sector work to hasten their efforts in compliance by demonstrating their ability to perform with ESG objectives. Currently, suppliers who are unable to meet the outcomes under the social value model will be at a competitive disadvantage – 10% is enough to win or lose a bid.

Arguably, such changes to procurement in the public sector are pushing the march towards corporations demonstrating ESG practices, over and above existing UK legislation. PPN 06/20 displays a marked shift in the UK Government and public procurement practices. It seeks to acknowledge the rise in public concern regarding environmental and sustainability issues by taking steps towards ensuring taxpayers money is spent with this in mind.

Peter Collins is a Partner and Sydney Chandler is a Trainee Solicitor at Sharpe Pritchard LLP.

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