US Govt Proposes Rule Requiring Fed Contractors to Address Climate Risk or Be Ineligible for Awards

The Federal Acquisition Regulatory Council (“FAR Council”) has just issued a proposed rule (“Proposed Rule”) that will impose new requirements on federal contractors to disclose information about greenhouse gas (“GHG”) emissions and related financial risk as well as set “science-based” reduction targets. The Proposed Rule envisions a tiered-disclosure requirement based on whether a contractor is a “major” or “significant” contractor (determined by the cumulative value of the federal contracts annually held by a contractor). Critically, under the Proposed Rule, a contractor may be determined “nonresponsible” for failure to comply with the Proposed Rule’s requirements and thus ineligible  for contract awards.

In the event that a version of this rule is ultimately finalized, it would be prudent for contractors to begin assessing their internal systems for inventorying and reporting GHG emissions and identifying any gaps in comparison to the Proposed Rule’s requirements. In addition, contractors should consider providing comments no later than January 13, 2023.

Background

The Proposed Rule seeks to implement section 5(b)(i) of Executive Order 14030, Climate –Related Financial Risk (EO 14030), which directed consideration of an amendment to the Federal Acquisition Regulation (“FAR”) to address contractors’ disclosures of GHG emissions and climate-related financial risk.

This information will “give [the US government] visibility to major annual sources of GHG emissions and climate risks throughout the Federal supply chain and could, in turn, provide insights into the entire U.S. economy.” Moreover, through “increased public transparency and accountability,” the rule also encourages contractors “to take action” and “increase the resilience of the Federal supply chain.”

Tiered Inventory and Disclosure Requirements – “Significant” vs. “Major” Contractors

The Proposed Rule imposes tiered requirements for inventorying and disclosing a contractor’s various categories of GHG-emissions (i.e., Scope 1, Scope 2, and Scope 3 GHG emissions)¹ based on whether the contractor is “significant” or “major” (“Significant Contractor” or “Major Contractor”).

• Significant Contractors are those that received between $7.5 million and $50 million in federal contract obligations in the prior federal fiscal year. (A number of companies that would qualify as small businesses under federal size standards may well meet the definition of Significant Contractors.)
• Major Contractors are those that received more than $50 million in federal contract obligations.

Significant and Major Contractors – Inventory and Disclose Scopes 1 and 2 GHG Emissions

Both Significant and Major Contractors (or their immediate or highest-level owner) must inventory their annual Scope 1 and Scope 2 GHG emissions described above “within [their] current or previous fiscal year.” These contractors must follow the GHG Protocol Corporate Accounting and Reporting Standard (“GHG Protocol”) to inventory these Scope 1 and Scope 2 emissions. Contractors may use any emissions calculation tool so long as it aligns with the GHG Protocol.

Upon completion of the GHG emissions inventory, Significant and Major Contractors must then disclose the annual Scope 1 and Scope 2 inventoried emissions in the System for Award Management (“SAM”), publicly accessible at www.sam.gov.

Major Contractors – Annual Climate Disclosure Covering Scopes 1-3 Emissions

Along with inventorying and disclosing Scopes 1 and 2 emissions, Major Contractors must also inventory and disclose Scope 3 GHG emissions.² Major Contractors accomplish this through submitting an “annual climate disclosure” by:

(i) “[C]ompleting those portions of the CDP (formerly Carbon Disclosure Project) Climate Change Questionnaire that align with the Task Force on Climate-related Financial Disclosures (“TCFD”) as identified by CDP within its current or previous fiscal year”; and

(ii) Posting the annual climate disclosure on a publicly accessible website (e.g., the company’s own website or the CDP website).

The Proposed Rule explains that an “annual climate disclosure” includes an inventory of Scopes 1-3 emissions and also “descriptions of the entity’s climate risk assessment process and any risks identified.”

Science-Based Emissions Reduction Targets

Additionally, Major Contractors must develop their own science-based reduction targets (i.e., targets that meet the goals of the Paris Agreement), which must be validated by the Science Based Targets Initiative (“SBTi”).

The following table summarizes the requirements of contractors based on the Proposed Rule (as adapted from the Office of the Federal Chief Sustainability Officer³).

Four Standards for Contractors to Follow in Inventorying and Disclosing

The Proposed Rule “leverages existing third-party standards and systems” in developing the FAR Council’s amendments to the FAR and explains that “this rule engages contractors through widely-accepted protocols and platforms that they are already using to publicly disclose annual climate data to a variety of other interested parties.” The rule requires contractors to use the following four standards:

• The GHG Protocol Corporate Accounting and Reporting Standards and Guidance. This tool is “the most widely used accounting tool to track corporate GHG emissions.”
• The 2017 TCFD Recommendations. The task force’s recommendations “cover Governance, Strategy, Risk Management, and Metrics and Targets”⁴ and address “climate-related risks across two major categories: (1) risks related to the transition to a lower-carbon economy, and (2) risks related to the physical impacts of climate change.”
• The CDP Climate Change Questionnaire. This questionnaire enables companies, through a standardized process, to report their annual GHG emissions and climate change risk.
• The SBTi criteria. The initiative’s purpose, as its namesake suggests, is to “provide a clearly-defined pathway for companies to reduce GHG emissions in line with reductions that the latest climate science deems necessary to meet the goals of the Paris Agreement.”

Exceptions, Exemptions, and Waivers to Requirements

Exceptions. The Proposed Rule excludes contractors with less than $7.5 million in annual federal contract obligations. (As noted above, contractors with $7.5 million or more in contract obligations may qualify as “small” businesses under federal size standards.) It also excludes various entities from its reach even if they would otherwise qualify as either a Significant or Major Contractor. These entities include:

• An Alaska Native Corporation, a Community Development Corporation, an Indian tribe, a Native Hawaiian Organization, or a Tribally owned concern, as those terms are defined at 13 CFR 124.3.
• A higher education institution (defined as institutions of higher education in the OMB Uniform Guidance at 2 CFR part 200, subpart A, and 20 U.S.C. 1001).
• A nonprofit research entity.
• A state or local government.
• An entity deriving 80 percent or more of its annual revenue from federal management and operating contracts that are subject to agency annual site sustainability reporting requirements.
• Small businesses (as determined by their North American Industry Classification System code identified in the entity’s SAM registration) and nonprofit organizations that qualify as “major contractors” do not have to comply with the enhanced requirements for “major contractors.” Instead, these entities must comply with the requirements for a “significant contractors” (i.e., inventory Scope 1 and Scope 2 emissions and report them in SAM).

Exemptions. The Proposed Rule contemplates exempting offerors from the disclosure requirements if these offerors are “exempt from the requirement to be registered in [SAM] at the time an offer or quotation is submitted.”

Waivers. The Proposed Rule authorizes the senior procurement executive (“SPE”) to provide the following waivers:

• Procedure Waivers. The SPE may approve a waiver of the rule’s requirements for facilities, business units, or other defined units for national security purposes in addition to for emergencies and other mission essential purposes.
• Entity Waivers. The SPE may also approve up to one-year waivers for a contractor to come into compliance with the Proposed Rule’s requirements.

Annual Representations in SAM

The Proposed Rule requires contractors to make representations and certifications in their annual SAM registration regarding the information required by the rule. Specifically, contractors will be required to represent whether they are either a Significant or Major Contractor. If contractors satisfy either status, then they must also represent whether they are subject to an exception and, if not, whether they completed their obligations under the rule.

These new representations will assist the CO in determining whether the requirements under the Proposed Rule apply to a contractor and, if so, whether the contractor is in compliance.

Responsibility Determinations

The Proposed Rule adds a new standard of contractor responsibility under FAR Part 9—the rule adds a FAR section 9.104-3(e), Public Disclosure of Climate Information. This section directs COs to “presume the prospective contractor is nonresponsible pursuant to 9.104-1” unless the CO determines that:

• Noncompliance resulted from circumstances properly beyond the prospective contractor’s control;
• The prospective contractor has provided sufficient documentation that demonstrates substantial efforts to comply; and
• The prospective contractor has made a public commitment to comply as soon as possible on a publicly accessible website (within one year).

Start Times of Compliance Enforcement: One- and Two-Year Delayed Compliance

The Proposed Rule provides one- and two-year buffers before requiring contractors to comply with aforementioned requirements.

• Significant and Major Contractors will have a one-year delay (beginning when the final rule takes effect) before they must satisfy the Scopes 1 and 2 GHG emissions inventory and disclosure requirements.
• Major Contractors will have a two-year delay before they must comply with the enhanced requirements applicable only to Major Contractors.

Takeaways

The Proposed Rule is clear that the federal procurement system is being used as a tool to effect climate policy. The rule recognizes that “[p]ublic procurement can shift markets, drive innovation, and be a catalyst for adoption of new norms and global standards.”

If the Proposed Rule is implemented, the government intends to use the information gleaned from the disclosures to develop further policies and programs to address climate-related risks and GHG emissions—and contractors can expect future climate-related requirements to be imposed.

Contractors must appreciate that compliance will be required for all future procurement opportunities for Significant or Major Contractors. The Proposed Rule is clear that it will treat contractor’s compliance as a matter of contractor responsibility, potentially affecting eligibility for future awards.

Section IV of the Proposed Rule discusses its expected effects, which include the anticipated costs of implementing the rule to the government and industry, as well as expected benefits such as requiring Major Contractors to identify science-based targets for reducing GHG emissions consistent with the Paris Agreement. Significant and Major Contractors also will need to assess and address supply chain impacts.

To the extent the FAR Council has not considered impacts, it is incumbent on contractors to provide comments during the public comment period ending on January 13, 2023. The FAR Council specifically requests input on multiple areas to include on the entities excepted from the rule’s requirements and potential alternatives and the four existing third-party standards identified and potential alternatives. Any comments must be submitted by January 13, 2023.

As discussed above, assuming some version of this rule is finalized, it would be prudent for contractors to now begin assessing their current internal systems for inventorying and reporting GHG emissions and identifying gaps that may affect their ability to comply with the Proposed Rule's requirements.

¹ The Proposed Rule identifies three types of GHG emissions that contractors, depending on their category, will have to inventory and disclose annually. The rule defines these emissions as:

• Scope 1 emissions. Direct GHG emissions from sources that are owned or controlled by the reporting entity.
• Scope 2 emissions. Indirect GHG emissions associated with the generation of electricity, heating and cooling, or steam, when these are purchased or acquired for the reporting entity’s own consumption but occur at sources owned or controlled by another entity.
• Scope 3 emissions. GHG emissions, other than those that are Scope 2 emissions, that are a consequence of the operations of the reporting entity but occur at sources other than those owned or controlled by the entity.

² See FN 1 for Scope 3 GHG emissions definition.

³ https://www.sustainability.gov/federalsustainabilityplan/fed-supplier-rule.html

⁴ Id.