Proposed Amendments to the Federal Acquisition Regulation —Greenhouse Gas Emissions and Climate-Related Financial Risks
The Federal Acquisition Regulatory Council (“FAR Council”) published a proposed rule in the Federal Register on November 14, 2022, that would create several significant compliance obligations for federal contractors. Under the proposed rule, nearly all federal contractors would be required to disclose their greenhouse gas (“GHG”) emissions, and certain contractors also would be required to disclose climate-related financial risks and set science-based targets to reduce their GHG emissions.
And as described in more detail below, these new requirements would be implemented as criteria for contractor responsibility under Federal Acquisition Regulation (FAR) Part 9, meaning that an offeror for a federal procurement may be ineligible for an award if it has not made the required disclosures. As a result, contractors should closely monitor developments with the proposed rule because if it is finalized as written, contractors will be required to adopt several new processes in order to remain presently responsible and eligible to continue performing federal government work.
Applicability of the Proposed Rule
The proposed rule — Federal Acquisition Regulation: Disclosure of Greenhouse Gas Emissions and Climate-Related Financial Risk — implements President Biden’s Executive Order 14030 of May 20, 2021, which directed the FAR Council, in consultation with others, to consider amending the FAR to require “major Federal suppliers” to publicly disclose such climate-related information.1 The proposed rule applies to two categories of companies: (1) “significant contractors” and (2) “major contractors.” As defined in the rule, significant contractors are offerors that received $7.5 million or more, but not exceeding $50 million, in federal contact obligations in the prior fiscal year as indicated in the System for Award Management (“SAM”). Major contractors are offerors that received more than $50 million in federal contract obligations for the prior fiscal year as indicated in the SAM.
Requirements of the Proposed Rule
The rule requires new climate-related disclosures and targets for contractors depending on a contractor’s status as either a significant or major contractor:
- Disclosure of Scope 12 and Scope 23 GHG emissions. Both significant and major contractors would need to complete a GHG inventory of their annual Scope 1 and Scope 2 GHG emissions and disclose their total annual Scope 1 and Scope 2 GHG emissions in the SAM. Contractors would be required to follow the GHG Protocol Corporate Accounting and Reporting Standard to conduct a GHG inventory, but are provided some discretion to use a calculation tool of their choice to calculate emissions, as long as the tool aligns with the Standard. GHGs to be disclosed include carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), nitrogen trifluoride (NF3), and sulfur hexafluoride (SF6).
- Annual Climate Disclosure. Major contractors would be required to complete an annual climate disclosure by completing relevant portions of the CDP Climate Change Questionnaire.1 The proposed rule declares that the annual climate disclosures align with the recommendations of the Task Force on Climate-Related Financial Disclosures (“TCFD”) — a voluntary framework for the disclosure of climate risks and opportunities delineated along four major pillars: governance, strategy, risk management, and metrics and targets. The annual climate disclosure would include a GHG inventory of Scope 1 and Scope 2 GHG emissions, as well as relevant Scope 32 GHG emissions. Moreover, the disclosure would also describe the contractor’s climate risk assessment process and any climate-related risks identified. These would include risks associated with the transition to a lower-carbon global economy, as well as physical risks from climate-related hazards. Major contractors would be required to make the disclosures available online
- Science-Based Targets. Major contractors would also need to develop a science-based target to reduce their GHG emissions in line with the goals of the Paris Agreement, which include limiting global warming to well below 2°C above pre-industrial levels and pursuing efforts to limit such warming to 1.5°C. The science-based target must be validated by the SBTi (Science Based Targets initiative — a partnership among the CDP, the United Nations Global Compact, the World Resources Institute, and the World Wildlife Fund). Like the annual climate disclosure, major contractors would have to make the validated science-based target available on a publicly available website.
The proposed rule does excuse certain significant or major contractors from compliance with the new requirements. These include: Alaska Native Corporations, Community Development Corporations, Indian Tribes, Native Hawaiian Organizations, Tribally-owned concerns, higher education institutions, nonprofit research entities, state or local governments, and entities deriving more than 80% of their annual revenue from certain federal management and operating contracts.
In addition, the proposed rule states that an entity that is a nonprofit organization or that qualifies as a small business under its primary North American Industry Classification System (“NAICS”) code would be exempt from the annual climate disclosure and science-based target requirements, even if the entity satisfies the definition of “major contractor.” However, such entities that are “significant contractors” would not be exempt from the requirement to complete a GHG inventory to disclose Scope 1 and Scope 2 emissions. Notably, the proposed rule also includes no exception for contractors engaged exclusively in contracts for commercial products or services under FAR Part 12.
Compliance with the Proposed Rule
Beginning one year after publication of the final rule, both significant and major contractors must have completed their GHG inventory and disclosed total Scope 1 and Scope 2 GHG emissions in the SAM. The remaining requirements, applicable only to major contractors, would need to be satisfied beginning two years after publication of the final rule.6 A contractor will be considered in compliance with the requirements if it completes these actions itself or through its immediate or highest-level owner, although the contractor itself must report the results of the GHG inventory in the SAM.
As mentioned above, if a significant or major contractor fails to comply with the requirements of the proposed rule, contracting officers generally would be required to treat such contractors as non-responsible and ineligible for contract award. However, the proposed rule does provide contractors some flexibility, stating that the offeror may avoid a non-responsibility determination if the contracting officer determines that: (1) noncompliance resulted from circumstances properly beyond the offeror’s control; (2) the offeror has provided sufficient documentation demonstrating substantial efforts to comply; and (3) the offeror has made a public commitment to comply within one year. As with other responsibility matters, the application of this exception to the presumption of non-responsibility would fall within the contracting officer’s discretion. Thus, if they have not complied with the rule’s requirements, contractors would still be at risk of being passed over for contracts they otherwise might have won if the contracting officer is not satisfied with the contractor’s responses.
The proposed rule provides that an agency’s senior procurement executive can waive the new requirements for emergencies, national security, or other mission-essential purposes. Perhaps recognizing the significant burdens of the new requirements, the proposed rule also states that the senior procurement executive can waive the requirements for a specific entity to provide up to one additional year for such entity to come into compliance. However, agencies would be required to publish such entity-specific waivers online.
The Proposed Rule and the U.S. Securities and Exchange Commission’s (“SEC”) Proposed Rule on Climate-Related Disclosures
On March 21, 2022, the SEC released a proposed rule — The Enhancement and Standardization of Climate-Related Disclosures for Investors — that would require U.S. and foreign private issuers to provide certain climate-related information in their registration statements and annual reports. The SEC’s proposed rule on climate-related disclosures, largely modelled on the TCFD framework, aims to facilitate transparent, comparable, reliable, and “decision useful” climate-related financial information, responsive to investor demands for the same.7
Both the SEC’s proposed rule on climate-related disclosures and the FAR Council’s proposed rule would require disclosure of GHG emissions metrics as well as climate-related financial risks (identification and assessment processes). However, the FAR Council’s proposed rule goes significantly further than the SEC’s proposed rule in one respect. The SEC proposed rule would require public companies to disclose only climate-related targets they have already set, but it would not impose any obligation to set such targets. By contrast, the FAR Council’s proposed rule would require major contractors to set science-based targets if they have not already done so. Effectively, then, the FAR Council’s proposed rule imposes a heightened level of climate-related disclosures on public companies that are major contractors as compared to the SEC’s proposed rule.
Additionally, while there are similarities with respect to the content of the disclosures required under both the SEC’s proposed rule and the FAR Council’s proposed rule, the amendments proposed to the FAR specifically require that federal contractors provide their disclosures using the CDP Climate Change Questionnaire (which is not required under the SEC’s proposed rule). The FAR Council’s proposed rule notes that this will “maximize the consistency, comparability, and accessibility of disclosure data for use in managing Federal procurements and supply chains.”8
The proposed rule, while expected, is yet another indication that the Biden Administration’s focus on responding to climate change continues to sweep across the Federal government, with climate-related financial information increasingly becoming a means to demonstrate and measure progress toward emissions reduction efforts and the transition to a low-carbon economy. If finalized as written, the FAR Council’s proposed rule would bring climate-related risks to the forefront of federal agencies’ procurement decisions, and the requirements of the proposed rule would represent a significant new burden for federal contractors, with serious ramifications for non-compliance.
Comments on the proposed rule are due by January 13, 2023.
1 See Using Federal Procurement to Combat Climate Change: A Survey of Options for the FAR Council and Risks for Contractors, V&E Insight (June 29, 2021).
2 Scope 1 emissions are defined as direct emissions from sources owned or controlled by the reporting company.
3 Scope 2 emissions are defined as indirect emissions arising from the generation of electricity, heating and cooling, or steam that are acquired for the reporting company’s own consumption but occur at sources owned or controlled by another entity.
4 The CDP (formerly known as the Carbon Disclosure Project) is an international non-profit organization with a global environmental disclosure system.
5 Scope 3 emissions are defined as emissions that are a consequence of the operations of the reporting entity but occur at sources owned or controlled by another entity.
6 Compliance as to setting a science-based target validated by the SBTi may prove problematic for certain major government contractors. For example, companies in the Oil & Gas sector currently are unable to have any science-based targets validated by the SBTi, which is in the process of developing a new methodology applicable to this sector. These process issues will impact federal contractors involved in these industries. More generally, it takes some time to obtain an SBTi-validated science-based target. Thus, to comply with the proposed rule’s requirement of posting such information within two years, it is likely that major contractors will need to apply for validation immediately after the rule is finalized, if not sooner.
7 For more information, see Proposed SEC Climate Disclosures: An Overview of the Proposed Rule and What Companies Need to Do Now, V&E (Apr. 11, 2022).
8 Federal Acquisition Regulation: Disclosure of Greenhouse Gas Emissions and Climate-Related Financial Risk, 87 Fed. Reg. 68312 (Nov. 14, 2022) (to be codified at 48 C.F.R. pts. 1, 4, 9, 23, and 52).
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.