11 June 2021
Throughout 2020 and 2021 we have seen a dramatic rise in voluntary Net Zero commitments made by large multinationals – including the likes of BP, Walmart, PwC, Microsoft and Apple. Although these pledges are often voluntary and non-binding, they represent an unprecedented shift in corporate decarbonisation efforts throughout the global economy.
Despite these efforts, one of the first reports scrutinising these commitments published by The University of Oxford has been critical of their lack of clarity and ambition. It is estimated that only 1/3 of corporate Net Zero targets include Scope 3 emissions (which are those generated by corporates’ supply chains) but which account for approximately 90% of total emissions of large oil companies. A Net Zero pledge that does not cover Scope 3 emissions is, in effect, a commitment to reduce only 10% of the company’s carbon footprint, while using language indicative of a much higher ambitions. This discrepancy between what business say, and what they do, has resulted in greenwashing concerns surrounding Net Zero pledges.
Why Scope 3 emissions matter
‘Scope 3’ is an umbrella term for emissions from a corporation’s entire value chain and its products – from sourcing raw materials to emissions generated from the use of the end products. In companies which produce goods for consumption, lifecycle assessments of carbon footprint of products can reveal embodied emissions, which, in many cases, surpass the emissions generated from the company’s owned or controlled resources (so-called Scope 1 emissions) by as much as five-fold. This makes mitigation of Scope 3 emissions paramount to achieving Net Zero on a global scale.
There are many issues with measuring, reporting and mitigating supply chain emissions. Firstly, there is a risk of double-counting where emissions of one supplier are counted in supply chains of multiple corporates.
Whilst big multinational corporations have both the means and finance to adequately measure and report on their emissions, the task becomes more difficult lower down the supply chain. Arguably, suppliers in developing countries may be unfairly and disproportionately impacted by the most burdensome obligations related to their emissions and can even risk losing business for a failure to comply. Imposing overly onerous measuring, reporting and mitigating obligations on small suppliers can result in an unfair burden being placed on those players whose relatively small carbon footprint is a part of a bigger entity’s value chain.
This is why governments have a pivotal role to play in relation to Scope 3 emissions. As one of the world’s largest type of customer sourcing contractors via competitive tender processes, national governments have the leverage to demand that their contractors Net Zero targets actually encompass their Scope 3 emissions. Governments can also influence their country’s regulatory responses to unfair and unintended consequences of demanding reductions in Scope 3 emissions by requiring that multinationals pass not only their mitigation targets but also their knowledge and expertise in the field to those suppliers, who would not be otherwise able to comply with the targets at their own expense.
Power of public procurement
Government expenditure on works, goods and services represent around 19% of EU GDP, accounting for roughly EUR 2.3 trillion annually and in the US, amounts to US$ 11 trillion or 13% of global GDP. Total UK public sector procurement spend alone amounts to £290 billion a year. Public procurement can be a very powerful way to respond to social, environmental and economic challenges and drive behaviour not just of public but also private sector actors in the market.
Many private sector tenders are issued as part of the supply chain for larger public sector projects. This arises where the winner of the initial large public sector contract cannot provide every aspect of the goods, works and services required to fulfil that project. As such, the private sector company will seek sub-contractors through a private sector tender for the sub-contracted work. This private-public connection and dependence means that public procurement has enormous potential to cascade Net Zero obligations down supply chains to reduce emissions of their operations worldwide.
Potential of public procurement in decarbonising supply chains
The focus by governments on public procurement as a policy instrument in achieving their Net Zero goal has increased in recent years.
By way of example, the City of Oslo in Norway uses procurement as a strategic tool to achieve climate goals. As part of the Oslo’s Procurement Strategy for 2017, the government published the minimum requirements, award criteria and contractual requirements applied in construction procurement processes under the Climate and Environmental requirements for the City of Oslo’s construction site. Similarly, Helsinki in Finland leverages procurement as a key mechanism to achieve carbon neutrality by 2035 and reduce direct carbon emissions by 80 percent. In support of its Carbon Neutral Helsinki 2035 action plan, the government has set itself a target to include sustainable criteria in 100% of Helsinki procurement processes by 2020.
Green public procurement obligations tend to concentrate on the reduction of direct emissions from bidders’ own operations. There is a great potential for it to extend to the reduction of bidders’ Scope 3 emissions and accelerate the supply chain decarbonisation through tendering processes and procurement contracts.
Efforts associated with the reduction of bidders’ Scope 3 emissions can already be seen in the UK government’s recently published Procurement Policy Note 06/21 which has introduced a requirement for a contracting authority to apply a selection criterion for bidding suppliers to provide a Carbon Reduction Plan when procuring goods, services and/or works with a contract value above £5 million.
To tackle supply chain emissions procuring authorities could choose to award marks at the evaluation stage for those bidders that fully understand their carbon footprint. This could consider the carbon generated by the products or actions of their supply chain and the extent to which the bidders have a strategy in place to reduce it in line with the applicable Net Zero targets or framework.
This approach could also be formalised by including requirements in procurements such as measuring, reporting, mitigating and offsetting (where mitigation is not possible) of the contractors’ Scope 3 emissions. This would, in turn, encourage successful bidders to ensure that similar obligations are included in supply chain agreements with potential clauses allowing to terminate such agreements if obligations are not met to ensure compliance with their public procurement contracts. The contractors may also be required to assist their suppliers in meeting their gradually increasing obligations where they are not placed to undertake such exercise on their own.
Challenges
The potential of deploying public procurement as a tool to tackle Scope 3 emissions is not without challenges.
The EU Public Procurement Directives 2014, which at least for now form basis of the UK procurement regime, gives procuring authorities discretionary powers to use environmental award criteria when granting public contracts. This, as emphasised by the CJEU in the Concordia Bus case, is not an unrestricted freedom of a contracting authority and can only be used if the criteria are proportionate and linked to the subject matter of the contract.
It is also important to ensure that procurement contractual provisions concerning Net Zero obligations do not just set milestones but are properly and fairly enforceable through contractual remedies. This is crucial to the success of these provisions.
To ensure enforceability and avoid ‘carbon leakage’ (losing supply chain players to less regulated markets) it is essential that Net Zero contractual obligations are considered carefully and are drafted in collaboration with suppliers. A procuring entity should work closely with suppliers by way of exchanging data as to its Scope 3 emissions, sharing methodologies of reduction and adopting incentive structures to reward the supply chain for making lower carbon choices.
For further information, please contact:
David Hansom, Partner, Clyde & Co
david.hansom@clydeco.com
