Member Article

On May 20, 2021, President Biden issued Executive Order 14030, Climate-Related Financial Risk, which directed the implementation of policies that would “advance consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk.” Included in Executive Order 14030 is a directive that the Federal Acquisition Regulatory Council consider amending the Federal Acquisition Regulation (FAR) to “(i) require major Federal suppliers to publicly disclose greenhouse gas emissions and climate-related financial risk and to set science-based reduction targets; and (ii) ensure that major Federal agency procurements minimize the risk of climate change, including requiring the social cost of greenhouse gas emissions to 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 November 14, 2022, in response to Executive Order 14030, the Department of Defense, General Services Administration, and NASA published a proposed rule that would require certain federal contractors to (1) inventory their greenhouse gas (GHG) emissions, (2) conduct a climate risk assessment process, (3) develop science-based targets for reducing their GHG emissions, and (4) publish this information through SAM.gov. Comments on the proposed rule are due January 13, 2023. If adopted, the requirements of the proposed rule take effect one year after the publication of the final rule, which likely would be sometime in 2024.

The proposed rule applies to two different categories of federal contractors. A federal contractor who received more than $50 million in total federal contract obligations in the prior federal fiscal year (defined as a “major contractor” by the proposed rule) would have to:

• Conduct GHG inventories of
• GHG emissions from sources owned by the contractor (defined in the proposed rule as “Scope 1 emissions”);
• GHG emissions “associated with the generation of electricity, heating and cooling, or steam, when these are purchased or acquired for the reporting company’s own consumption but occur at sources owned or controlled by another entity” (defined in the proposed rule as “Scope 2 emissions”); and
• GHG 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” (defined in the proposed rule as “Scope 3 emissions”);
• Publish an annual climate disclosure that describes the contractor’s climate risk assessment process and any risks identified, through completion of the CDP Climate Change Questionnaire; and
• Develop science-based targets for reducing GHG emissions that are in line with reductions that the latest climate science deems necessary to meet the goals of the Paris Agreement, and have such targets validated by SBTi.

A federal contractor who received more than $7.5 million but less than $50 million in total federal contract obligations in the prior federal fiscal year (defined as a “significant contractor” by the proposed rule) would have to:

• Conduct GHG inventories of
• GHG emissions from sources owned by the contractor (defined in the proposed rule as “Scope 1 emissions”); and
• GHG emissions “associated with the generation of electricity, heating and cooling, or steam, when these are purchased or acquired for the reporting company’s own consumption but occur at sources owned or controlled by another entity” (defined in the proposed rule as “Scope 2 emissions”).

“Significant contractors” (i.e., those with between $7.5 million and $50 million of federal contracting revenue in the prior fiscal year) will not have to inventory their Scope 3 emissions. These are GHG 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.” Significant contractors would similarly not be required to publish an annual climate disclosure that describes the contractor’s climate risk assessment process and any risks identified, or adopt targets validated by SBTi.

Contractors who are subject to the proposed rule will be allowed to conduct the required inventory and disclosures either at the offeror level (i.e., a subsidiary of a parent corporation) or through its immediate owner or highest-level owner. As such, a parent company could conduct the required inventory and make assessments and disclosures for the entire corporate group, or individual entities within the corporate group could do so individually.

The proposed rule contains a delayed starting date. Starting one year after publication of a final rule, any significant or major contractor must have completed a GHG inventory and disclosed its total annual Scope 1 and Scope 2 emissions from its most recent inventory in SAM.gov. Major contractors will have two years after publication of the final rule to 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 develop and obtain SBTi validation of a science-based target for reduction of their GHG emissions.

For contractors that are subject to this new rule (if it goes into effect), contracting officers are directed to presume that the contractor is nonresponsible under FAR 9.104-1 if the contractor has not met the requirements of the rule unless the contracting officer 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).

Notably, the proposed rule completely exempts the following entities from its requirements:

• Alaska Native Corporations, Community Development Corporations, Indian tribes, Native Hawaiian Organizations, or a Tribally owned concern, as those terms are defined at 13 CFR 124.3, including entities owned or controlled by them;
• Higher education institutions (defined as institutions of higher education in the OMB Uniform Guidance at 2 CFR part 200, subpart A, and 20 U.S.C. 1001);
• Nonprofit research entities;
• State or local governments; and
• An entity deriving 80% or more of its annual revenue from management and operating contracts that are subject to agency annual site sustainability reporting requirements.

Major contractors—contractors with more than $50 million in federal revenue in the prior fiscal year—that are considered to be a small business based on the applicable SBA size standard for their primary NAICS code will have to comply with the requirement to conduct GHG emissions inventory of their Scope 1 and Scope 2 emissions. However, those small-business contractors will not have to inventory their Scope 3 emissions, publish an annual climate disclosure that describes the contractor’s climate risk assessment process and any risks identified, or adopt targets validated by SBTi.

The deadline for comments on this proposed rule is January 13, 2023, and comments may be submitted in response to FAR Case 2021-015 to the federal portal.

 This article summarizes aspects of the law and does not constitute legal advice. For legal advice for your situation, you should contact an attorney.

 

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