In 2006, the documentary An Inconvenient Truth chronicled former Vice President Al Gore’s efforts to educate the public on the consequences of climate change. In the sixteen years since the Academy Award-winning film was released, public interest in the impact that greenhouse gas (GHG) emissions have had, are having, and will have on our planet has increased exponentially. Most recently, at the 27th U.N. Climate Conference (COP27), countries from around the globe came together to discuss the implementation of battle plans to combat climate change. One such plan, which was discussed at COP 27 by President Biden, is a new Proposed Rule that would require “significant” and “major” federal contractors to disclose their GHG emissions and climate-related financial risk as well as set science-based targets to reduce their GHG emissions. If and when the Proposed Rule is finalized, it will have seismic implications for contractors, in that it ties contractor responsibility (i.e., a contractor’s ability to receive federal awards) to compliance with these requirements.
Background and Potential Changes to the FAR
The requirements in the Proposed Rule are derived from Executive Order 14030, Climate-Related Financial Risk (E.O.), which required the Federal Acquisition Regulation (FAR) Council to amend the FAR to “require major Federal suppliers to publicly disclose greenhouse gas emissions and climate-related financial risk and to set science-based reduction targets.” To that end, the Proposed Rule would amend the FAR to require certain federal contractors to complete disclosures on these topics in order to be considered “responsible” contractors. The E.O. envisioned that the FAR Council would require “major Federal suppliers” to complete the disclosures. The Proposed Rule divides major Federal suppliers into two categories: “significant” and “major” federal contractors. A significant contractor is defined as a supplier that received $7.5 million or more but not exceeding $50 million in federal contract obligations in the preceding fiscal year. A major contractor is one that received more than $50 million in federal contract obligations in the preceding fiscal year.
In addition to creating a new standard for determining the responsibility of a prospective contractor focused on compliance with these disclosure obligations, the Proposed Rule would create a new FAR Subpart, FAR 23.XX, “Public Disclosure of Climate Information,” and it would revise the existing climate-related representations at FAR 52.223-22, Public Disclosure of Climate Information–Representation and the representation within FAR 52.212-3, Offeror Representations and Certifications–Commercial Products and Commercial Services. Currently, through these two clauses, contractors are only required to indicate (1) whether they publicly disclose GHG emissions and (2) whether they publicly disclose a quantitative GHG reduction goal. If the contractor does disclose this information, it is required to provide the publicly accessible website(s) where GHG emissions and/or reduction goals are reported.
The new FAR Subpart would instruct contracting officers to (1) “treat a significant or major contractor as nonresponsible, unless it has (itself or through its immediate owner or highest-level owner) inventoried its annual GHG emissions, and the significant or major contractor has disclosed its total annual emissions in SAM [System for Award Management],” and (2) treat a major contractor as nonresponsible “unless it has (itself or through its immediate owner or highest-level owner) made available on a publicly accessible website an annual climate disclosure that was completed using the CDP Climate Change Questionnaire in its current or previous fiscal year and set targets to reduce its emissions.” By tying contractor responsibility—and thus contractor ability to receive federal awards—to these requirements, the Government is signaling that it intends to bring climate-related risk to the forefront of federal contracting.
The Proposed Rule would also require significant and major contractors to make several specific climate-related disclosures in SAM:
- First, a significant or major contractor will be required to complete a GHG inventory of its annual Scope 1 and Scope 2 emissions and disclose the total amount of such emissions in SAM. As currently defined by FAR 23.001, GHGs include carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perflourocarbons, nitrogen triflouride, and sulfur hexafluoride. Scope 1 emissions are those directly from sources owned or controlled by the reporting entity, while Scope 2 emissions include indirect GHG emissions associated with the purchase of electricity, steam, heat, or cooling. The Proposed Rule contemplates that contractors may calculate emissions “using the calculation tool of their choice, as long as it is in alignment with the GHG Protocol Corporate Accounting and Reporting Standard.”
- Second, major contractors will also be required to complete an annual climate disclosure within their current or previous fiscal year. This disclosure is composed of a set of disclosures by an entity that aligns with the recommendations of the Task Force on Climate-Related Disclosures (TCFD), and it includes an inventory of Scope 1 and 2 as well as Scope 3 emissions (emissions that are a consequence of the operations of the reporting entity but are produced occur at sources other than those owned or controlled by the entity). The annual climate disclosure would also describe the entity’s climate risk assessment process and any risks identified. The Proposed Rule contemplates that major contractors would complete “those portions of the CDP Climate Change Questionnaire that align with the TCFD as identified by CDP” and that the annual climate disclosure would be publicly accessible either on the contractor’s own website or the CDP website.
- Finally, major contractors will also be required to develop “science-based targets” that will be validated by the Science Based Targets Initiative (SBTi). As explained by the Proposed Rule, a science-based target is “a target for reducing GHG emissions that is in line with reductions that the latest climate science deems necessary to meet the goals of the Paris Agreement to limit global warming to well below 2°C above pre-industrial levels and pursue efforts to limit warming to 1.5°C[.]” The Proposed Rule requires that such targets be validated by SBTi within the five previous calendar years and the target information be published on a publicly available website.
Although the disclosure requirements will be broadly applicable to both commercial and noncommercial contractors, there are some significant exceptions. Entities that will not be required to complete the disclosures include (1) an Alaska Native Corporation, a Community Development Corporation, an Indian tribe, a Native Hawaiian Organization, or a Tribally owned concern; (2) a higher education institution; (3) a nonprofit research entity; (4) a state or local government; or (5) 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. In addition, major contractors that are (1) considered small businesses for their primary North American Industry Classification System code or (2) nonprofit organizations will not be required to complete an annual climate-based disclosure or set science-based targets, but such contractors will be required to complete a GHG inventory of their Scope 1 and Scope 2 emissions and report the same in SAM.
The FAR Council recognizes that it will take significant and major contractors time to comply with these new disclosure requirements, and it has accordingly built delayed starting dates into the Proposed Rule. The Proposed Rule would require significant or major contractors to complete a GHG inventory and disclose their total annual Scope 1 and Scope 2 emissions starting one year after publication of the eventual final rule. Major contractors will be required to meet their new compliance obligations (i.e., “complete a GHG inventory that covers relevant Scope 3 emissions; conduct a climate risk assessment and identify risks; complete the CDP Climate Change Questionnaire; and commit to, develop, and obtain SBTi validation of a science-based target”) within two years after publication of the final rule. In other words, compliance with this new policy likely is still many years off; as experienced Government contractors know, it can take months if not years for the FAR Council to collect and evaluate comments and ultimately issue a final rule.
Therefore, while these requirements may seem inconvenient and far in the future, contractors should understand that these climate-related risk disclosures may be an important component of responsibility determinations in the not-too-distant future. Comments on the Proposed Rule are due on January 13, 2023, and contractors that will be considered significant or major will want to ensure that their voices are heard as the FAR Council considers the form its final requirements will take. At a minimum, however, contractors should begin familiarizing themselves now with these potential obligations and the standards proposed for disclosure, or they risk losing status as a responsible contractor and jeopardizing their ability to do business with the Government.