FAR Council Issues Proposed Climate Disclosure Rule for Government Contractors

Executive Order 14057 — “Catalyzing Clean Energy Industries and Jobs through Federal Sustainability” — made it clear that the Biden administration plans to use federal procurement policy to further its sustainability goals. The Federal Acquisition Regulation (FAR) Council’s November 14 proposed rule, titled “Disclosure of Greenhouse Gas Emissions and Climate-Related Financial Risk,” is an example of how that plan may be actualized. We expect this proposed rule to be the first of many initiatives aiming to address climate change and sustainability through the federal procurement process.

Disclosure Requirements

The proposed rule would require certain federal contractors to “disclose their greenhouse gas emissions and climate related-financial risk and set science-based targets to reduce their greenhouse gas emissions.” Non-compliance would come with serious consequences: contractors who fail to meet the proposed rule’s requirements would be treated as “nonresponsible” and therefore ineligible to win the contract.

The proposed rule would only apply to “significant contractors” and “major contractors.” “Significant contractors” are contractors that received between $7.5 million and $50 million in total federal contract obligations in the prior fiscal year. “Major contractors” are contractors that received more than $50 million in total federal contract obligations in the prior fiscal year. The rule would require contractors to complete a representation certifying as to their status. The proposed rule does not cover contractors that received less than $7.5 million in total federal contract obligations in the prior fiscal year. The requirements in the proposed rule also do not apply to a significant or major contractor who belongs to any of the following categories:

• Alaska Native Corporations
• Community Development Corporations
• Indian Tribes
• Native Hawaiian Organizations
• Tribally Owned Concerns
• Higher Education Institutions
• Nonprofit Research Entities
• State or Local Governments
• Entities deriving 80% or more of its annual revenue from federal management and operating contracts that are subject to agency annual site sustainability reporting requirements.

The proposed rule’s requirements center around three deliverables: a greenhouse gas inventory, an annual climate disclosure and science-based targets.

• Greenhouse Gas Inventory: A Greenhouse Gas (GHG) Inventory is a list of emission sources and their associated emissions. GHGs include carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, nitrogen trifluoride and sulfur hexafluoride. The proposed rule categorizes GHG emissions as Scope 1, Scope 2 or Scope 3 emissions. Scope 1 emissions are GHG emissions from sources that are owned or controlled by the reporting contractor. Scope 2 emissions are GHG emissions associated with the generation of electricity, heating and cooling or steam, when these are purchased or acquired for the reporting contractor’s own consumption but occur at sources owned or controlled by another entity. Scope 3 emissions are GHG emissions that are a consequence of the operations of the reporting contractor but occur at sources other than those owned or controlled by the contractor.
• Annual Climate Disclosure: An annual climate disclosure “is a set of disclosures by an entity that aligns with recommendations of the [Task Force on Climate-related Financial Disclosures].” It includes a GHG Inventory of Scope 1, Scope 2 and Scope 3 emissions and a description of the contractor’s climate risk assessment process and any risks — including financial risks — that the process may have identified.
• Science-Based Targets A science-based target is a target for reducing GHG emissions that is in line with reductions that the latest climate science deems necessary to meet the goals of the Paris Agreement.

Under the proposed rule, a “significant contractor” would be required to complete a GHG Inventory of its Scope 1 and Scope 2 emissions and to disclose that Inventory in SAM.

The requirements imposed on “major contractors” would be much greater under the proposed rule. Similar to significant contractors, a major contractor would be required to complete a CHG Inventory of its Scope 1 and Scope 2 and to disclose that Inventory in SAM. But a major contractor would also be required to complete an Annual Climate Disclosure by inventorying its Scope 3 emissions and completing a Carbon Disclosure Project Climate (CDP) Climate Change Questionnaire, and then posting the results on a publicly accessible website. A major contractor would also be required to develop science-based targets, have those targets validated by the Science Based Targets Initiative(SBTi) and post those targets on a publicly accessible website.

Should this rule be finalized, it would have a significant impact on federal contractors, especially those with over $50 million in federal contract obligations. As a result, federal contractors should begin to determine whether they would be considered a significant or major contractor and assess what information they will need to collect to ensure their eventual compliance with the proposed rule.

In the meantime, federal contractors should consider commenting on the proposed rule. Comments will be accepted until January 13, 2023. Our team will continue to monitor the status of this proposed rule. If you have questions or need assistance, please contact a member of Faegre Drinker’s government contracts team.