Using Federal Procurement to Combat Climate Change: Recent Developments and Potential Paths Forward
By Maggie Peloso, Dan Graham, Zach Terwilliger, Conrad Bolston, Lindsay Hall, and Alex Sprenger*
On May 20, 2021, President Biden signed a long-anticipated Executive Order on Climate-Related Financial Risk. Executive Order (“EO”) 14030 establishes a policy “to advance consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk,” addressing such broadly varying actions as potential regulation of climate risk in the U.S. financial system and the Department of Labor’s Trump-era Environmental, Social and Governance investing rules. Notably, EO 14030 proposes to use federal procurement and lending programs as a test bed for a variety of climate-related initiatives, from contractor disclosure requirements to agency use of climate data in making award decisions. As with many other policies issued by the Biden administration, EO 14030 expresses a desire to focus on the transition to a low carbon and climate-conscious economy as an opportunity to create American jobs and enhance the administration’s environmental justice goals. EO 14030 also reiterates the Biden administration’s target of making the United States a net-zero emissions economy no later than 2050.
With respect to federal procurement, EO 14030 proposes to integrate climate disclosure and impact reduction efforts into the acquisition process. Specifically, EO 14030 requires that the Federal Acquisition Regulatory (“FAR”) Council, in consultation with the Council on Environmental Quality and other agencies, consider amending the Federal Acquisition Regulation to:
- Require major federal suppliers to (i) publicly disclose greenhouse gas emissions and climate-related financial risk and (ii) set science-based reduction targets; and
- Require that the social cost of greenhouse gas emissions be considered in procurement decisions and, where appropriate and feasible, give preference to bids and proposals from suppliers with a lower social cost of greenhouse gas emissions.
On October 15, 2021, the FAR Council published in the Federal Register an Advance Notice of Proposed Rulemaking (the “October 15 Advance Notice”) announcing the opening of a public comment period on potential amendments to the FAR to implement EO 14030. The October 15 Advance Notice involves one of two cases the FAR Council opened in response to EO 14030:
- FAR Case No. 2021-015, Disclosure of Greenhouse Gas Emissions and Climate-Related Financial Risk, implements section 5(b)(i) of EO 14030, which directs the FAR Council to consider amending 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.
- FAR Case No. 2021-016, Minimizing the Risk of Climate Change in Federal Acquisitions, implements section 5(b)(ii) of EO 14030, which directs the FAR Council to consider amending the FAR to ensure that major agency procurements minimize the risk of climate change and consider the social cost of greenhouse gas emissions in procurement decisions.
The October 15 Advance Notice also builds on the White House’s broader “Roadmap to Build an Economy Resilient to Climate Change Impacts,” which was released earlier in the day on October 15.
The October 15 Advance Notice involves the second of the two FAR cases, No. 2021-016, and broadly seeks comment on the incorporation of greenhouse gas emissions information into the federal procurement process and use of the federal procurement process to mitigate climate-related financial risks. The October 15 Advance Notice seeks feedback on a number of questions, including:
- How can greenhouse gas emissions, including the social cost of greenhouse gases, best be qualitatively and quantitatively considered in federal procurement decisions, both domestic and overseas? How might this vary across different sectors?
- What are usable and respected methodologies for measuring the greenhouse gases emissions over the lifecycle of the products procured or leased, or of the services performed?
- How might the federal government best standardize greenhouse gas emission reporting methods? How might the government verify greenhouse gas emissions reporting?
- How might the federal government give preference to bids and proposals from suppliers, both domestic and overseas, to achieve reductions in greenhouse gas emissions or reduce the social cost of greenhouse gas emissions most effectively?
These questions underscore the pervasive and sweeping scope of potential changes that could be made to the FAR to implement EO 14030, including climate disclosures, data validation, and self-certification, which could ultimately raise new enforcement risks under the False Claims Act. The questions also emphasize the potential that EO 14030 could substantially alter the manner in which Federal procuring agencies consider climate-related risks as part of their best value determinations in individual procurements.
Possible FAR Council Action
The October 15 Advance Notice indicates that the FAR Council is aware that it has a variety of existing models to draw upon as it considers how to require government contractors to disclose their emissions and climate-related financial risks, how to set science-based reduction targets, and how to objectively give preferential treatment to bids and proposals based on these climate metrics.1 Motivated in part by changing consumer preferences, investors have been demanding enhanced climate disclosure and impact-reduction efforts from companies for years and European regulators already have advanced guidelines on reporting this information. A new rule requiring emissions reporting and the establishment and disclosure of science-based climate targets for suppliers would be a sea change for the federal government, but it may simply bring the United States in line with the leading edge of climate-related supply chain requirements.
Amending Existing FAR Sustainability Requirements
Currently, FAR Part 23 contains several provisions that address environmental issues in federal contracting. Under this section, federal agencies must ensure that 95% of new contract actions require products that are: (1) energy-efficient; (2) biobased; (3) non-ozone depleting; (4) water-efficient; (5) non-toxic or less toxic alternatives; or (6) made with recovered materials. FAR Part 23 also prescribes acquisition policies and procedures for protecting and improving the quality of the environment and fostering markets for sustainable technologies, materials, products, and services.
Under FAR subpart 23.2, federal agencies are directed to utilize energy-savings performance contracts to obtain energy-efficient technologies, acquire energy- and water-efficient products and services, and acquire products that use renewable energy technology. Contracts under this subpart must include FAR 52.223-15, which requires contractors to “ensure” that energy-consuming products are energy efficient products. Similarly, FAR subpart 23.7 directs agencies to meet additional environmental objectives through the acquisition process, including cost-effective waste reduction and obtaining hazardous waste minimizing products and services. This subpart provides that contracts must include FAR clause 52.223-10, which requires contractors to establish a program to promote cost-effective waste reduction under the contract and comply with federal, state, and local environmental requirements during contract performance.
Additionally, FAR subpart 23.4 directs agencies to develop and implement affirmative procurement programs to purchase products composed of the highest percentage of recovered (recycled) material or biobased content practicable. This subpart incorporates by reference the standards for the minimum amount of recovered material or biobased content in items designated by the U.S. Environmental Protection Agency (“EPA”) or the U.S. Department of Agriculture (“USDA”), and agencies must implement a program to require contractors to provide reasonable estimates, certification, and verification of recovered material used in the performance of contracts. For example, certain contracts must contain FAR 52.223-1, which requires contractors to certify that biobased products, as defined by the USDA, will be used or delivered in performance of the contract, and FAR 52.223-4, which requires contractors to certify that the percentage of recovered materials for EPA-designated content will be at least the amount required under the contract.
Moreover, FAR subpart 23.8 directs agencies to minimize the procurement of materials and substances that contribute to the depletion of stratospheric ozone and give preference to the procurement of alternative chemicals. As prescribed under this subpart, federal government contracts must include FAR clauses 52.223-11 and 52.223-12, which address the labeling of ozone-depleting substances and contractor compliance with the Clean Air Act. FAR 52.223-11, for example, requires contractors to track the amount of ozone-depleting substances contained in equipment delivered to the government under the contract and annually report that amount to the government during the contract’s performance. Contracts under this subpart must also include FAR 52.223-22, the provision that requires contractors to publicly disclose greenhouse gas emissions and reduction goals, if the clause was included in the initial contract solicitation.
Given that FAR Part 23 already outlines specific environmental guidelines for Federal procurements, the FAR Council may propose to amend several subparts of this section or establish an entirely new section to implement EO 14030 and expand upon the existing use of contractor reporting and mechanisms of preferencing certain products to achieve the goals of EO 14030.
Environmental Sustainability Self-Certification
As noted above, the FAR requires contractors to certify the amount of biobased or recovered materials used during contract performance, and the FAR Council could expand the environmental self-certifications required in FAR Part 23 to address EO 14030. More broadly, as any contractor that has registered in the System for Award Management or completed Section K of a Federal solicitation knows, the FAR relies heavily on self-certification to implement a variety of statutory and regulatory programs that are applicable to government procurement. FAR 52.204-8 lists nearly three dozen representations and certifications that contractors may have to make, depending on the particular contractor and the particular procurement. For example, under the Small Business Act, Federal contracts may be set aside exclusively for competition from small businesses. In order to qualify for these set aside contracts, small businesses must certify their small business status and eligibility.
The FAR Council could try to replicate this model for the implementation of EO 14030. Under such a model, companies could certify to the accuracy of their publicly disclosed greenhouse gas emissions inventories, climate-related financial risk assessments, and to their established science-based reduction targets, whether those have been established through compliance with an existing voluntary framework or through some other method. Contracting officers could review these certifications the same way they review other existing certifications, as part of a binary assessment of present responsibility or under a pass/fail evaluation factor.
But this assumes that simply making some disclosure or setting some target is all that EO 14030 requires. The much harder question for the FAR Council is whether to require meaningful disclosures and targets, and the even harder question is how contracting officials will verify such disclosures and targets. Looking at the various representations and certifications currently prescribed by FAR Part 23 or listed in FAR 52.204-8 suggests that self-certification, without more, may not be a workable implementation of EO 14030’s provisions on disclosure and target-setting.
Moreover, it is not clear how self-certification would address EO 14030’s mandate that the FAR Council consider requiring that procurement decision-making criteria include a bidder’s social cost of greenhouse gas emissions. As EO 14030 focuses on “suppliers,” the FAR Council may establish climate risk and emissions disclosures, and adoption of science-based reduction targets from suppliers, but not require such metrics or consider the social cost of carbon in the evaluation of procurement awards for services contractors or in procurements for services (or at least not in the initial rulemaking contemplated by EO 14030 ). But “suppliers” or procurements for “supplies” hardly narrows the inquiry, as those terms span many industries with very different greenhouse-emissions characteristics.
Regardless of how the FAR Council defines the universe of procurements to which EO 14030 applies, the basic challenge with self-certification is that it potentially places procurement officials and government customers in the position of evaluating disclosures, targets, and social cost estimates that they are not qualified to assess. Without detailed guidance in the FAR on how to evaluate this information, contracting officers and their advisors would be left with mountains of climate data but no framework within which to evaluate it. And without detailed guidance to contractors on what will be required to meet any requirements that the FAR Council imposes, the government’s ability to obtain full and open competition from all responsible offerors competing on a level playing field will be in jeopardy.
Leveraging Existing Voluntary Frameworks
As discussed above, the October 15 Advance Notice specifically asks, “What are usable and respected methodologies for measuring the greenhouse gases emissions over the lifecycle of the products procured or leased, or of the services performed?” This question suggests that the FAR Council is considering existing, voluntary frameworks as a model for best practices methodologies in climate impact inventorying and impact reduction efforts that could be adjusted and adopted in the FAR to achieve the goals of EO 14030. Certain government contractors may be familiar with the more prominent voluntary frameworks for climate risk disclosure, such as the Task Force on Climate-related Financial Disclosures (“TCFD”) and for setting emissions reduction targets, such as the Science-Based Targets initiative (“SBTi”). These frameworks could serve as a template for the FAR Council’s establishment of emissions data and climate risk disclosure terms, as well as processes for companies to establish an achievable and verifiable emissions reduction goal.
The TCFD was established in 2015 by the G-20 Financial Stability Board to encourage the disclosure of consistent climate-related financial information. In 2017, the TCFD released a set of climate-related disclosure recommendations along with the accompanying technical supplement and annex, which includes supplemental guidance for certain sectors. The framework is structured around four main categories of climate disclosures (governance, strategy, risk management, and metrics and targets) and recommends determining materiality in a manner consistent with the governing law in the jurisdiction where a company makes required securities filings. The risk management pillar of the TCFD framework may be particularly helpful for the FAR Council’s reference in building out climate-related financial risk disclosure guidelines. The TCFD has become the gold-standard for voluntary climate disclosures, even being endorsed by the G7 as a basis for mandatory climate reporting.2
The SBTi is a partnership between the Carbon Disclosure Project, the United Nations Global Compact, the World Resources Institute, and the World Wide Fund for Nature. The SBTi assists companies with setting emissions-reduction targets in line with global decarbonization pathways established in the 2015 Paris Agreement. The SBTi defines and promotes best practices based in climate science, provides technical assistance and expert resources to companies that set emissions goals, and offers a team of technical experts to independently assess and validate targets. A company can establish a SBTi-validated target after following the SBTi’s five-step process: (1) submitting a letter establishing the intent to set a science-based target, (2) developing an emissions-reduction target in line with the SBTi’s criteria (including identifying the scope of emission to be included in such target), (3) presenting such target to SBTi for official validation (requiring comparison of the submitted target against the company and industry-specific target protocols, if available), (4) communicating such target to relevant stakeholders, and (5) thereafter annually reporting on emissions and tracking progress toward set targets. Currently, the SBTi has finalized sector-specific methods for only four industries: power, information and communication technology, apparel and footwear, and financial institutions. Methods for the aluminum, chemicals, forest and land, agriculture, oil and gas, and transport sectors are either in development or in an early scoping phase.
These established voluntary frameworks, among others, could provide a model for the FAR Council to draw upon as it considers how to amend the FAR. There is precedent for the FAR to reference third-party standards,3 as well as for requiring compliance with other governmental models,4 for preferencing programs in the environmental context,5 and for disclosure of greenhouse gas emissions for certain offerors.6 However, it is unclear whether the FAR Council would wholesale adopt or refer to a non-governmental standard, or create a bespoke framework. Should the FAR Council attempt to use these frameworks as a model for their own industry-specific climate disclosures, emissions inventories and impact reduction targets, more work will need to be done to prescribe detailed standards for the numerous industries in which government contractors operate. If instead the FAR Council mandates a uniform emissions reduction target — for example, net-zero emissions by 2050 in alignment with the NDC — this would appear to run contrary to EO 14030’s goal of each supplier setting individual science-based targets, the application of which may result in a variety of customized targets.
There are many risks likely to arise in government contracting as a result of the complexity of climate-related disclosures and emissions reduction targets. Depending on what requirements are imposed on contractors and when, implementation of EO 14030 may provide a substantial competitive advantage in individual procurements to contractors that have invested the time and energy to understand the existing regimes for climate impact inventorying and reduction and to integrate those regimes into their governance and operations. Conversely, contractors that do not make this investment may find themselves on the sidelines of critical acquisitions, or, even worse, exposed to potential liability under the False Claims Act (“FCA”).
As discussed above, self-certification is a feature of the FAR’s existing environmental policies and may feature prominently in the FAR Council’s rules implementing EO 14030. Any certification or representation made by a company to the government presents an FCA risk. However, climate data, by its very nature, is somewhat inherently limited. Many companies are still in the early stages of determining how to calculate their own carbon footprints.7 Relying on currently available climate data, flawed as it may be, to create forward-looking statements in good faith is unlikely to create a risk that a company “knowingly” made false statements to the government. Yet, relying on climate data that a company knows to be false, inaccurate, misleading, or so outside of the norm of generally accepted standards that it could be considered reckless, could create risk during both the bid process and ultimately during any investigation after the fact.
In the near term, given the federal government’s recent aggressive trajectory pointing toward enhanced climate change disclosures and emissions reduction targets and the preferential status likely to be provided to advantageous climate metrics in bids, government contractors seeking a competitive advantage during the procurement process would be wise to begin preparing for changes to FAR requirements. We suggest that government contractors:
- Begin building an interdisciplinary team of internal and external counsel, advisors and managers with climate sophistication, outline processes for emissions and other impact inventories, strategize the achievability of impact reduction targets, and outline a possible climate disclosure strategy. Businesses that already have robust climate risk assessment and disclosure regimes in place should prepare to revise their internal procedures to comply with possible FAR Council requirements.
- Act in good faith, and given the language in the EO 14030, carefully consider the tradeoffs associated with satisfying stakeholder or government demands for enhanced climate disclosures along with the data and metrics necessary to support any associated climate metrics and targets.
- Build and maintain a reasonable record of efforts related to climate reporting. This documentation could pay dividends in the long run should concerns over the basis for climate statements ever arise.
*Alex Sprenger, 2021 Summer Associate, contributed to this series post.
1 See FAR 23.703 (requiring agencies to “Implement cost-effective contracting preference programs promoting energy-efficiency, water conservation, and the acquisition of environmentally preferable products and services”); FAR 23.802 (indicating federal policy that “Give[s] preference to the procurement of acceptable alternative chemicals, products, and manufacturing processes that reduce overall risks to human health and the environment.”); FAR 23.804 (requiring a representation regarding greenhouse gas emission and reduction goals in certain situations).
2 See G7 Finance Ministers & Central Bank Governors Communiqué (June 5, 2021), https://home.treasury.gov/news/press-releases/jy0215.
3 See FAR 23.704 (requiring the government’s purchase of specified percentages of EPEAT®-registered electronic products, which include those adhering to the IEEE 1680.1TM-2009 Standard, established by the non-governmental Institute of Electrical and Electronics Engineers Standards Association).
4 See, e.g., EPA ENERGY STAR® program referenced under FAR Subpart 23.2.
5 See FAR 23.703 (requiring agencies to “Implement cost-effective contracting preference programs promoting energy-efficiency, water conservation, and the acquisition of environmentally preferable products and services”).
6 See FAR 23.802 (requiring certain offerors who are registered in the System for Award Management and who have received $7.5 million or more in federal contract awards in the prior federal fiscal year to represent whether they publicly disclose a quantitative greenhouse gas emission reduction goal and provide a website for such disclosure, if available).
7 The EPA has promulgated rules regarding the calculation GHG emissions data from over 40 types of large emission sources. 40 CFR Part 98. One material complication in voluntary emissions disclosure frameworks is whether companies should include each of Scope 1 (direct emissions that occur from sources that are controlled or owned by a disclosing company), Scope 2 (indirect emissions associated with the disclosing company’s purchase of electricity, steam, heat, or cooling) and Scope 3 (emissions that result from a disclosing company’s customers’ use of the product, or that the company indirectly impacts in its value chain) emissions in their footprint inventories.
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.