ESG into PFI - a common goal?

Expiry and Handback might be the buzz words in the PFI industry just now but with an increased emphasis on ESG (Environmental, Social and Governance) from both the public and Private sector there are questions about how ESG targets can be successfully embedded and delivered against in the UK PFI portfolio here and now - the presumed driving force behind the Infrastructure and Projects Authority establishing a ‘Net-Zero Working Group’ with industry.

Thefirst of two blog posts shares CURSHAW’s thoughts on why ESG is so important in the sector, the key difficulties in embedding it within operational PFI projects and some of the initiatives to date. Our second blogpost will look at suggested next steps and thoughts on how key issues can be overcome to make some genuine strides in ESG goals.

Overview

In our CURSHAW view ESG can be an effective tool for creating better alignment between the public and Private sector as it is something both parties can work on - something that the PFI initiative may well have benefited from at the very start. 

Are both the public and Private sector players really ready to commit to making substantial change to achieve  Net Zero aspirations and wider UN Sustainable Development Goals (SDGs)?

It’s not easy but a coordinated effort to work together embedding ESG within the Governance at the interface between the public and private sector parties will improve the likelihood that every opportunity under these long-term contractual arrangements is taken. 

The obvious opportunity is around using existing lifecycle budgets and long term asset management plans to introduce Net Zero compliant assets to make genuine progress on the pathway to Net Zero prior to handback; however delivering this effectively is predicated on having high integrity carbon data that is linked to asset systems and the underlying asset data - something we are yet to see in the industry with providers sadly using CSV and XLS files completely independently of asset data to baseline their carbon footprints. In addition to the data problem there is the added complexity of varying agreements to reflect the need to support Net Zero asset management strategies. As yet there is no standardised documentation to support what is clearly needed and has to happen and nor is there a public Procurement Notice to support Contracting Authorities through the process of effecting variations.

Why is ESG Important?

The aftermath of COVID-19 has been a driver for the UK Government to address ESG principles as part of their procurement processes.  The introduction of Procurement Policy Note 06/20 requires all UK Government procurements to include ESG themes (minimum 10% weighting) to the selection process. The 5 themes are COVID19 recovery, tackling economic inequality, fighting climate change, providing equal opportunities, and improving well-being.

In addition, the UK Government remains committed to its target of achieving Net Zero by 2050 with a number of Departments, Executive Agencies and NDPBs setting even more challenging targets e.g. the NHS is seeking to be Net Zero by 2040 for those emissions they control directly.

While there is no single/clear set of ESG regulations at present the private sector are driven by the recognition that evidencing strong ESG principles can drive enhanced shareholder value.  The majority of key PFI investors and large FM contractors have developed ESG principles and targets and report on these on an annual basis.  Reporting against the UN SDGs and seeking to implement Science Based Targets shows a real willingness to achieve measurable and auditable outcomes..

Why is it so difficult to embed ESG in the PFI sector?

The majority of PFI agreements were signed before ESG was a consideration (and certainly before the PPN 06/20 introducing a minimum weighting of 10% to social value) and therefore the nature of these complex long-term agreements means they are not realistically aligned to the current UK Government aims and targets.  This misalignment can make the achievement of large scale changes from an environmental perspective difficult.  

Our public sector network often feels hamstrung by the PFI agreements and a lack of resources (commercial expertise to negotiate and the funding to finance) to support the technological changes they need to make.  In addition there is often a feeling that the private sector are supposed to bring their expertise and innovation but is it fair and reasonable to expect this without partnership working and recognition of the fact that contracts will need to be varied.

From a private sector perspective it is often cited the public sector are often too focussed on short term issues, a result of very short budgeting cycles, rather than looking at long term planning for the assets.  A clearer strategic view of what the public sector requires from assets in the medium to long term, including beyond the concession periods i.e in relation to preferred post-PFI target operating models, could make it easier for the private sector to come forward with solutions which will inevitably take time to negotiate and implement.  

Initiatives to date

An analysis of both PFI investor and FM contractor annual and  and ESG reports identifies a range of initiatives to support all three pillars of ESG  from working with public sector entities to encouraging more diversity into the FM workforce to raising charitable funds for investment directly back into the local communities their assets serve.  Clearly the  ‘S’ and ‘G’ of ESG are, on a wide range of projects, being addressed.

The ‘E’ of ESG is however where most impact could and needs to be made.  There are good examples of improvements such as LED lighting, improved Waste recycling and improved Building Control systems but we are yet to identify any projects where there is a full decarbonisation plan in place that is being implemented. 

So what next and how can the industry overcome some of these issues? Our second blogpost on this issue will consider, and seek to address, these questions.

What’s next?

If you would like to have a further conversation on any aspects discussed in this blogpost with our expert team, who have lived and breathed this work and the complexities and nuances involved, please get in touch at hello@curshaw.com. You can read about the team and their experience here.