November 10, 2022

In Monday’s Federal Register, the Federal Acquisition Regulatory (FAR) Council will publish a proposed rule to implement elements of President Biden’s May 20, 2021 Executive Order (EO) 14030, “Climate-Related Financial Risk,” and require certain federal contractors to disclose information regarding their greenhouse gas (GHG) emissions and climate-related financial risk and set science-based targets to reduce their GHG emissions.

The proposed rule: (1) includes a framework designed to “maximize the consistency, comparability, and accessibility of disclosure data for use in managing federal procurements and supply chains”; and (2) includes a separate requirement for “major” contractors (as defined immediately below) to set science-based targets to reduce their GHG emissions.

Covered Contractors

The proposed rule separates major federal contractors into two categories – “significant contractors” and “major contractors.” A contractor is considered a “significant contractor” if the supplier received $7.5 million or more, but not exceeding $50 million, in federal contract obligations in the prior federal fiscal year as indicated in the System for Award Management (SAM). A contractor is considered a “major contractor” if the contractor received more than $50 million in federal contract obligations in the prior federal fiscal year. The FAR Council notes that there were approximately 4,413 entities that received between $7.5 million and $50 million in federal contract obligations in Fiscal Year (FY) 2021, of which 2,835 (64 percent) are estimated to be small businesses.  There were approximately 1,353 entities that received more than $50 million in federal contract obligations in FY 2021, of which 389 (29 percent) are estimated to be small businesses.

GHG Inventory

Under the proposed rule, and starting one year after publication of a final rule, both significant and major contractors would be required to complete a GHG inventory of their annual “Scope 1” and “Scope 2” GHG emissions. GHGs generally include carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, nitrogen trifluoride, and sulfur hexafluoride. “Scope 1” emissions under the proposed rule 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. The GHG inventory would represent emissions during a continuous period of 12 months, ending not more than 12 months before the inventory is completed. Significant and major contractors would be required to disclose in SAM the total annual Scope 1 and Scope 2 emissions identified through their most recent GHG inventory. 

In addition, and starting two years after publication of a final rule, major contractors would be required to conduct a GHG inventory of their relevant “Scope 3” emissions, which 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 requirement to inventory Scope 3 emissions would not be applicable to significant contractors.

Annual Climate Disclosure

Starting two years after publication of a final rule, major contractors would be required to complete an annual climate disclosure. These annual climate disclosures would be required to align with the 2017 Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and the 2021 TCFD update. The FAR Council notes that companies following the TCFD recommendations will assess two types of climate risks: (1) transition risks associated with the transition to a lower-carbon global economy, the most common of which relate to policy and legal actions, technology changes, market responses, and reputational considerations; and (2) physical risks emanating from climate change, which can be event-driven such as increased severity of extreme weather events (e.g., cyclones, droughts, floods, and fires) as well as longer-term shifts in precipitation and temperature and increased variability in weather patterns (e.g., sea level rise). Overall, the annual disclosures would include a GHG inventory of not only the Scope 1 and Scope 2 emissions, but also relevant Scope 3 emissions as discussed above. The annual climate disclosure would also describe the entity’s climate risk assessment process in addition to any risks identified. 

A major contractor would provide its annual climate disclosures by completing those portions of the “CDP Climate Change Questionnaire” that align with the TCFD, as identified by the CDP (formerly the Carbon Disclosure Project) in its guidance.  Companies receive an invitation to disclose once annually through CDP on behalf of all investors, corporate customers, and/or government customers requesting their response.  Companies complete and submit their response to the CDP Climate Change Questionnaire through CDP’s online response system.  Once completed, the annual climate disclosure would be made available on a publicly accessible website, which could be the company’s own website or the CDP website.

Science-Based Targets

Starting two years after publication of a final rule, a major contractor would also be required to develop science-based targets and have the targets validated by the Science Based Targets Initiative (SBTi). A science-based target refers to 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.  Companies can commit to set a science-based target by submitting a letter to SBTi and will be recognized as “committed” on the SBTi website. Once committed, a company has 24 months to submit their targets to SBTi for validation. Under the proposed rule, targets must be validated by SBTi within the previous five calendar years and must also be made available on a publicly accessible website. 

Exceptions

The proposed rule includes a number of exceptions from these inventory/disclosure requirements. Specifically, a significant or major contractor would not be not required to inventory its Scope 1 or Scope 2 emissions and a major contractor would not be required to complete an annual climate disclosure or set science-based targets if it is: (1) an Alaska Native Corporation, a Community Development Corporation, an Indian tribe, a Native Hawaiian Organization, or a tribally-owned concern; (2) an institution of higher education; (3) a nonprofit research entity; or (4) an entity deriving 80 percent or more of its annual revenue from federal management and operating contracts that are subject to agency annual site sustainability reporting requirements. Moreover, a major contractor who is registered in SAM as a small business for its primary NAICS code or is a nonprofit organization would be exempt from the requirement to complete an annual climate disclosure and to set a science-based target. That said, the major contractor would still be required to complete a GHG inventory of its Scope 1 and Scope 2 emissions and report these total annual emissions in SAM.

Annual Representations

Under the proposed rule, 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, the contractor would be required to indicate whether it: (1) is subject to an exception; (2) has completed, within its current or previous fiscal year, a GHG inventory of the annual Scope 1 and Scope 2 emissions (evidenced by a report in SAM of the total annual Scope 1 and Scope 2 emissions identified in its most recent inventory); (3) makes available on a publicly accessible website an annual climate disclosure that was completed using the CDP Climate Change Questionnaire within its current or previous fiscal year; and (4) makes available on a publicly accessible website a science-based target that has been validated by SBTi.

Comments on this proposed rule are due by January 13, 2022 and can be submitted here under “FAR Case 2021-015.”

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