Businesses with higher CO2 emissions are more likely to secure government contracts with environmental requirements, new research finds. And companies that participate in green contracting get greener, seeing a decrease in their CO2 emissions.

A one per cent increase in emissions corresponded to a 1.4 per cent higher probability of a green contract, according to the global study of green procurement.

“This seems counterintuitive at first,” says study co-author Giulia Sargiacomo, a Rotman School of Management PhD candidate. “But if we think about the mission of governments to reduce emissions, it makes sense. They’re using green procurement as a policy tool to incentivize government suppliers that have room for improvement on the sustainability front to change their environmental behaviour.”

The research found that suppliers signing on to green public contracts also subsequently demonstrate greater environmental responsibility through more sustainable product choices and supply-chain adaptations, such as ending relationships with environmentally non-compliant suppliers.

To date, there’s been little research on the role of governments in the sustainability marketplace. Yet they’re huge players. In Canada, procurement at all government levels represents about 15 per cent of GDP spending. The global average is about 13 per cent.

“Unlike standard government procurement contracts, green procurement contracts have greater complexity and oversight, and there are explicit sustainability requirements for businesses to consider,” says Sargiacomo, who co-authored the study with Rotman professor Ole-Kristian Hope and PhD graduates Muhammad Azim and Sasan Saiy.

Becoming a green supplier to governments demands next-level commitment and accountability. So companies naturally wonder what it takes to land these contracts and whether it’s worth the hassle. 
The new findings offer important insights to firms thinking about getting into the game. The key takeaways answer two pressing questions.

First, what factors help businesses secure green contracts with governments? 

Apart from higher CO2 emissions, the researchers found that, not surprisingly, firms with political connections were 46 per cent more likely to get a green contract in the following year than those without those ties.

And firms with past government procurement experience — even if it wasn’t green — were 44 per cent more likely to get a green contract than those lacking this history. 

The second big question: what impact do these contracts have on companies?

The finding on the greening of firms participating in green public contracts has benefits that go beyond environmental sustainability.

“Partnering with government in green procurement sends a very strong signal of credibility to the public,” says Sargiacomo. In a marketplace where consumers are growing more suspicious of greenwashing, these results can boost companies’ brands.

“Business leaders also want to know if there will be any big economic trade-offs for them in green government procurement,” she says. “We found they don’t have to put aside financial performance for environmental performance.”

While there was a modest reduction in their return on assets, firms were not materially worse off over the three years following green contracting than their peers without green contracts.

To arrive at these results, the researched used the TenderAlpha dataset, a database of more than 85 million government contracts — including 4.5 million green contracts — across 50 countries.
The study focused on data between 2010 and 2023, a time when governments worldwide began making increasing investments in a growing number of green contracts.

Why? Sargiacomo points to the 2015 Paris Agreement as a big catalyst. “Governments started paying more attention to sustainability on a lot of fronts, from financial tools like green bonds to green procurement,” she says.

The study showed significant geographic variation in the adoption of green public procurement. Governments in more developed countries awarded the highest number of green contracts worth the most money. The U.S. was at the top, followed by the U.K., France and Japan. Canada was in the top 20. 

The sectors with the highest representation of green contracts included communications, healthcare, medical equipment, pharmaceutical products, and personal and business services. 
Based on her findings, Sargiacomo encourages companies with an interest in green contracts to take the leap.

“If you’re relatively small and don’t have prior public contracting experience, start with local government, where you might have some connections,” she says. “But if your company has a unique product, invest some time exploring the growing number of green contracts here in Canada and even abroad. They can be valuable partnerships that don’t come with a financial downside.”