Companies considered to be “major” or “significant” US federal government contractors soon may be required to provide climate disclosures as part of the Biden Administration’s suite of policies designed to achieve net-zero targets. On November 14, 2022, the Federal Acquisition Regulatory (FAR) Council published the Federal Supplier Climate Risks and Resilience Rule (Proposed Rule). As discussed in our recent post, the Proposed Rule requires climate disclosures from the several thousand federal contractors receiving the largest volumes of annual federal agency contract obligations. The Proposed Rule is intended to position the federal government to strengthen its supply chain by requiring major suppliers to set Paris Agreement-aligned emissions reduction goals.
The Proposed Rule creates a new subpart titled “Public Disclosure of Climate Information” in FAR part 23, which prescribes environmental policies applicable to federal contractors1, to expand climate-related representations and establish new responsibility standards for certain federal contractors. Significant and major federal contractors would be required to publicly disclose their greenhouse gas (GHG) emissions and climate-related financial risks and major contractors would be required to set science-based emissions reduction targets. “Major” contractors are those receiving more than $50 million in annual contracts; “significant” contractors are those that receive at least $7.5 million in annual contracts, but less than $50 million.
First, public disclosures of Scopes 1, 2 and 3 emissions, consistent with the GHG Protocol Corporate Accounting and Reporting Standards, would be required from major contractors. Disclosures of Scopes 1 and 2 emissions would be required from significant contractors.2 The Proposed Rule would require companies to use annual climate disclosures that are consistent with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), including aligned portions of the CDP Climate Change Questionnaire, which many companies (whether government contractors or not) already utilize for their voluntary climate-related disclosures. It is estimated that 31% of major contractors already disclose their GHG emissions through the System for Award Management.3 The annual climate disclosure would be made available on a publicly accessible website, such as the company’s ESG/sustainability webpage or on CDP’s website. The total annual emissions information would be included in the System for Award Management.
Second, the Proposed Rule would require major contractors to set science-based emissions reductions targets and post this information publicly on the Science-Based Targets initiative’s (SBTi)4 website or on the company’s public webpage. The Proposed Rule would specifically require development of science-based targets, consistent with the goals of the 2015 Paris Agreement of limiting global warming to well below two degrees Celsius above pre-industrial levels and pursuing efforts to limit warning to 1.5 degrees Celsius.5 These targets must be validated by the SBTi within the past five calendar years. Major contractors would post their targets to publicly accessible websites. Notably, the Proposed Rule would go beyond the disclosure rules proposed by the Securities and Exchange Commission (SEC) in March 2022 (as previously discussed here). The SEC’s proposal generally would require that registrants with targets disclose those targets, but would not require the establishment of such targets in the first instance.
Under the Proposed Rule, significant and major contractors would have to complete a GHG inventory and disclose the total annual Scope 1 and Scope 2 emissions within one year after publication of a final rule. Major contractors would have two years to complete a further GHG inventory covering 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.
The Proposed Rule would be enforced by presuming that prospective contractors who fail to satisfy the GHG inventory and reporting obligations are “nonresponsible” contractors under a new section to be added to FAR subpart 9.1 and, thus, such contractors would become ineligible to receive contracts or subcontracts through the federal government.
Comments on the Proposed Rule are due by January 13, 2023. Input is specifically requested on the appropriateness of the exceptions and potential alternatives, and on the use of the GHG Protocol, TCFD, CDP and SBTi standards. Several climate-related proposed rules have overlapping comment periods, including the Bureau of Land Management’s proposed waste prevention rule, the Internal Revenue Service and Treasury’s prior request for comments on energy tax benefit provisions of the Inflation Reduction Act, and the Environmental Protection Agency’s supplemental rule to reduce methane from oil and natural gas operations. In addition, the GHG Protocol is conducting four surveys to collect stakeholder input to understand the need, scope, and potential approaches to updating its Corporate Standard, Scope 2 Guidance, Scope 3 Guidance, and supporting documents to ensure effective, rigorous and credible accounting foundations for businesses to utilize. This activity across multiple entities may make it challenging for those submitting comments to ensure their feedback is harmonized across the various proposed rules and requests for comments.
1 Exceptions are proposed for certain entities, including for federally recognized tribes or tribal or Native corporations, higher education institutions, nonprofit research entities, state or local governments, and entities deriving 80% or more of annual revenue from federal management and operating contracts that are subject to agency annual site sustainability reporting requirements.
2 Contractors receiving less than $7.5 million in annual contracts would not be required to make emissions disclosures under the Proposed Rule.
3 Federal Acquisition Regulation: Disclosure of Greenhouse Gas Emissions and Climate-Related Financial Risk, 87 Fed. Reg. 68312, 68313 (Nov. 14, 2022) (to be codified at 48 C.F.R. pts. 1, 4, 9, 23, and 52); see also System for Award Management, Non-Federal User Guide – v2.7 (Jan. 25, 2020), https://gpa-mprod-mwp.s3.amazonaws.com/uploads/sites/10/2021/04/4.-SAM.gov_User_Guide-Manual-de-Usuario-.pdf (“Question 32 asks if your entity receives $7.5 million or more in Federal contracts during the previous Federal fiscal year. If so, this requires your entity to publicly disclose greenhouse gas emissions and reduction goals.”).
4 The SBTi is a partnership between CDP, the United Nations Global Compact, World Resources Institute (WRI) and the World Wide Fund for Nature. The partnership “defines and promotes best practice in emissions reductions and net-zero targets in line with climate science, provides technical assistance and expert resources to companies who set science-based targets in line with the latest climate science, and brings together a team of experts to provide companies with independent assessment and validation of targets.” See About Us, SCIENCE BASED TARGETS, available at https://sciencebasedtargets.org/about-us#who-we-are.
5 87 Fed. Reg. at 68314.