In latest edition of The Wright Toolbox:
- Proposed New Rule to Require Certain Federal Contractors to Disclose Greenhouse Emissions
Proposed New Rule to Require Certain Federal Contractors to Disclose Greenhouse Emissions
On November 14, 2022, the DOD, GSA, NASA jointly issued a proposed rule to amend the Federal Acquisition Regulation (FAR) to implement requirements to ensure certain federal contractors disclose their greenhouse gas emissions (GHG) and climate-related financial risk and set science-based targets to reduce their GHG.
The proposed rule is ostensibly to implement President Biden’s Executive Order (E.O.) 14030, Climate-Related Financial Risk. The E.O. directs the Federal Acquisition Regulatory Council (FAR Council), to consider an amendment to the FAR to ensure that GHG emissions are addressed. The rule proposes to separate federal contractors into two categories: “significant contractors” and “major contractors.” A contractor is considered a “significant contractor” if they received between $7.5 million and $50 million in federal contracts in the prior federal fiscal year. A “major contractor” is a contractor that received more than $50 million in federal contracts. According to data available in the Federal Procurement Data System, there were approximately 4,413 entities that received between $7.5 million and $50 million in federal contracts in FY 2021. There were approximately 1,353 entities that received more than $50 million in federal contracts in FY 2021. Accordingly, the proposed rule will collectively cover 86 percent of the government’s annual procurement expenditures.
The proposed rule requires both significant and major contractors to complete a GHG inventory of its annual “Scope 1” and “Scope 2” emissions. The significant and major contractors must also disclose the total annual Scope 1 and Scope 2 emissions identified through its most recent GHG inventory. For purposes of the rule “greenhouse gases” include carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, nitrogen trifluoride, and sulfur hexafluoride. “Scope 1” emissions include GHG emissions from sources that are owned or controlled by the reporting company. “Scope 2” emissions include 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.
In completing a GHG inventory, contractors must follow the GHG Protocol Corporate Accounting and Reporting Standard. Major contractors are also required to conduct a GHG inventory of their relevant Scope 3 emissions and complete an annual climate disclosure. Scope 3 emissions are 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. The annual climate disclosure must also describe the entity’s climate risk assessment process and any risks identified. The annual climate disclosure must be made available on a publicly accessible website, which could be the company’s own website.
The major contractors are also required to develop “science-based targets” which must be validated in accordance with the standards set forth in the rule. 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 to limit global warming to well below 2 °C above pre-industrial levels and pursue efforts to limit warming to 1.5 °C. These targets must be also be made available on a publicly accessible website.
As provided in the proposed rule, a contracting officer is required to treat a significant or major contractor as nonresponsible, unless it has inventoried its annual GHG emissions, and the significant or major contractor has disclosed its total annual emissions in SAM. A major contractor shall also be treated as nonresponsible, unless it has made available on a publicly accessible website an annual climate disclosure.
There are certain exceptions to the application of the proposed rule as follows:
- An Alaska Native Corporation, a Community Development Corporation, an Indian tribe, a Native Hawaiian Organization, or a Tribally owned concern;
- A higher education institution;
- A nonprofit research entity;
- A state or local government; or
An entity deriving 80 percent or more of its annual revenue from Federal management and operating (M&O) contracts that are subject to agency annual site sustainability reporting requirements.
If a major contractor is considered a small business for the NAICS code or if it is a nonprofit organization, then it is not required to complete an annual climate disclosure or to set science-based targets.
Starting one year after publication of a final rule, a significant or major contractor must have completed a GHG inventory and the significant or major contractor must have disclosed the total annual Scope 1 and Scope 2 emissions from its most recent inventory. The compliance requirements for major contractors will start two years after publication of a final rule.
Finally, all contractors that register in SAM will be required to represent on an annual basis whether they are a significant contractor or a major contractor. If a contractor represents that it is a significant or major contractor, then the contractor will be required to represent whether it (1) is subject to an exception, (2) has completed a GHG inventory of the annual Scope 1 and Scope 2 emissions, (3) makes available on a publicly accessible website an annual climate disclosure; and (4) makes available on a publicly accessible website a science-based targets.
Comments to the proposed rule are due by January 13, 2023. If you have any questions regarding this proposed rule, please contact any member of our Government Contract’s practice group.