As President Biden prepared to jet off to the United Nations COP27 Climate Summit in Egypt, his administration announced a proposed rule that would dramatically enhance government contractors’ compliance obligations related to climate change.
The proposed rule would require certain federal contractors to disclose their greenhouse gas (GHG) emissions and, in some cases, assess their climate risks and set emissions reduction targets to meet goals set by the 2015 Paris Agreement. Those who fail to comply with the proposed rule will be deemed “nonresponsible” and ineligible for a contract award, absent an applicable exception.
The proposed rule divides contractors into three categories to determine relevant requirements: lesser, significant and major contractors. Lesser contractors – businesses who receive $7.5 million in annual contracts or less – are exempt from the proposed rule. Below we explore the proposed requirements for “major” and “significant” contractors.
Significant contractors are businesses with more than $7.5 million but less than $50 million in federal contract obligations for the prior fiscal year as indicated in the System for Award Management (SAM). The proposed rule would require significant contractors to annually inventory and disclose Scope 1 and Scope 2 GHG emissions.
Scope 1 emissions are those GHG emissions – carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, nitrogen trifluoride, and sulfur hexafluoride – emitting from company-owned sources. Scope 2 emissions are defined as those resulting from electricity generation, heating, or cooling purchased for the company’s own consumption from some source not owned or controlled by the reporting company.
The proposed rule requires the reporting company to first conduct a GHG inventory of emissions over a continuous 12-month period in accordance with the GHG Protocol Corporate Accounting and Reporting Standard. The inventory must be conducted and results posted in SAM starting one year after the publication of the final rule and annually thereafter.
Major Contractors – those businesses with more than $50 million in federal contract obligations in the prior fiscal year – must comply with added requirements. In addition to inventorying and disclosing Scope 1 and 2 emissions, major contractors must inventory and disclose Scope 3 GHG emissions – those emissions resulting from the reporting entity’s operation but coming from sources not owned or controlled by the major contractor.
Major contractors must also complete an annual climate disclosure describing the major contractor’s climate risk assessment process and identify any financial risks posed by climate change. The contractor must complete the Carbon Disclosure Project’s (CDP) Climate Change questionnaire and make the disclosure publicly available on the contractor’s own or the CDP website.
The last and potentially most onerous stipulation requires major contractors to develop “science-based” emissions targets. The target must “provide a clearly-defined pathway for companies to reduce GHG emissions in line with reductions that the latest climate science deems necessary to meet the goals of the Paris Agreement” and validated by the Science Based Targets initiative (SBTi) – a partnership between CDP, the UN Global Compact (UNGC), World Resources Institute (WRI), and the World Wide Fund for Nature (WWF). Major contractors must comply with the same timeline as significant contractors for Scope I and Scope II emissions, however, they have two years to inventory and submit Scope 3 emissions, disclose their climate risk assessment, and set their emissions-reduction targets.
The proposed rule creates carve-outs for certain types of federal contractors. Those exceptions include the following:
- Alaska Native Corporations, Community Development Corporations, Indian tribes, Native Hawaiian Organizations, and Tribally owned concerns.
- Higher education institutions.
- Nonprofit research activities.
- State and local governments.
- Entities deriving 80% or more of its annual revenue from federal management and operating (M&O) contracts subject to agency annual site sustainability reporting requirements.
Major contractors considered small businesses for their identified North American Industry Classification System (NAICS) code as its primary NAICS code are similarly exempted. Also, nonprofit organizations with more than $50 million in federal contract obligations are not required to complete the annual climate disclosure but must still complete a GHG inventory of Scope 1 and 2 GHG emissions and report the findings in SAM.
From the COP27 lectern, to great applause, President Biden emphasized the proposed rule proclaiming, “Just yesterday, the United States became the first government to require that our major federal suppliers disclose their emissions and climate risks and set targets for themselves that are aligned with the Paris Agreement.” The federal government is the world’s single largest purchaser of goods and services, awarding over $650 billion in 2020, giving the government the unique ability to shift markets and drive broader adoption.
The administration believes that requiring contractors to publicly disclose their emissions, climate-related financial risks and setting GHG reduction targets will allow greater transparency into potential supply chain weakness, strengthening the infrastructural integrity of the economy and will incentivize companies to do more to fight climate change under the “what gets measured gets managed” belief.
However, these changes bring greater administrative burdens and increased costs to federal suppliers, especially for small businesses. The proposed rule estimates that the industry will incur $604 billion in implementation costs in the initial year and a little over $442 billion annually after that. Moreover, if the rule becomes final, these requirements are not voluntary. Contractors in noncompliance risk losing federal contract opportunities and being deemed “nonresponsible.”
The proposed rule was published on Monday, November 14, and is open for comments until January 13, 2023. Please contact the author if you have any questions about the proposed rule and how it may impact your business.