Evaluating Environmental, Social and Governance (ESG) factors in public procurement
The requirements of contracting authorities and the role that ESG factors play
Current position under the Public Contracts Regulations 2015
As it stands, contracting authorities are bound by the current requirements of the PCR, which require contracts to be awarded based on the most economically advantageous tender (MEAT). Whilst the MEAT may be the lowest priced, more usually it is a combination of price and “quality” so far as quality is linked to the subject matter of the contract. This means that any social and environmental award criteria that contracting authorities consider currently to evaluate bids must be linked to the subject matter of the contract.
Helpfully, Regulation 67(5) states that (our emphasis) “award criteria shall be considered to be linked to the subject-matter of the public contract where they relate to the works, supplies or services to be provided under that contract in any respect and at any stage of their life cycle…even where those factors do not form part of their material substance’. It can still be something of a challenge to make environmental and/or social aspects a key feature of the award of contracts, however. If it is included at all it is often only a relatively small part of the overall evaluation alongside price and other quality criteria.
‘The Green Paper: Transforming public procurement’ was published back in December 2020. The Government's key policy priorities in reforming the public procurement rules are to deliver economic growth and recovery from COVID-19, levelling up and tackling climate change. Feedback following the consultation is currently being considered, and last month the Cabinet Office announced that there will be no new procurement laws until "2023 at the earliest” which means that we will be living with the current rules for some time yet.
Taking account of social value in the award of central government contracts
Since 1 January 2021, central government departments, their executive agencies and non-departmental public bodies which are subject to PCR 2015 have been required to expressly evaluate key environmental, social and governance (ESG)-related factors in their procurement exercises through use of a social value model. Again, however, this has to be ‘related and proportionate to the subject-matter of the contract’. This requires a 10% minimum weighting to be given to ESG objectives in each procurement. The choice of 10% as the minimum weighting is interesting, and a higher weighting can be applied if justified. Application of the model is mandatory in central government but commercial teams retain flexibility in deciding which of a menu of outcomes should be applied to their particular procurement to ensure relevance and proportionality.
This requirement does not apply to “sub-central contracting authorities” which are not central government authorities, such as local authorities or NHS Trusts, although under the current rules there is nothing to stop them choosing to adopt this or a similar requirement if they wished to do so.
National Procurement Policy Statement
We have previously highlighted the importance for contracting authorities to have regard to the National Procurement Policy Statement (NPPS) and the accompanying Procurement Policy Note 05/21 when it comes to social value. Further details on this can be accessed in our article.
This PPN confirms that the Government intends to bring forward legislation when parliamentary time allows to ensure that all contracting authorities will be required to have regard to the NPPS when undertaking procurements. In the meantime, the PPN requires that all contracting authorities should familiarise themselves with the NPPS and that they should consider the following national priority outcomes alongside any additional local priorities in their procurement activities:
- creating new businesses, new jobs and new skills;
- tackling climate change and reducing waste; and
- improving supplier diversity, innovation and resilience.
The NPPS sets out the national priorities that all contracting authorities should have regard to in their procurement “where it is relevant to the subject matter of the contract and it is proportionate to do so”. We need to see the precise wording of the legislation but again you will note that there is an express linkage to the subject matter of the contract, which is consistent with the PCR.
Green Paper proposals
The Green Paper proposes a host of reforms to public procurement, but specifically, it places a greater emphasis on social value and environmental considerations. In particular, the Government has proposed that one of the interdependent principles to underpin the new regulatory framework is ‘public good’. This principle conveys the need for procurement to support the delivery of strategic national priorities including social, ethical, environmental, and public safety considerations.
The Government has proposed that it will replace the most economically advantageous tender award criteria with ‘most advantageous tender’.
However, the Government has again said that it will not completely abandon the requirement for award criteria to be linked to the subject matter of the contract. One of the main reasons is to ensure that SMEs are not disadvantaged by the imposition of any requirements (including relating to ESG) which are disproportionate and are not relevant or linked to the works, services or supplies which are actually being procured.
The Government has proposed amending this requirement to allow for exceptions which relate to specific circumstances, to be set out in further statutory guidance. Whilst we fully understand the need for proportionality, a direct link between ESG requirements and the subject matter of the contract is not always obvious, particularly in the supply chain, and in our view, this can operate to the detriment of the promotion of ESG objectives. It is hoped that the new rules and guidance will make this easier, particularly because in all likelihood, price and other quality criteria will remain paramount in most evaluation weightings in any event.
For further guidance on any legal issues relating to ESG, contact our ESG solicitors.