Summary

The Department of Defense, General Services Administration, and the National Aeronautics and Space Administration have issued a proposed rule that would revise the Federal Acquisition Regulations (“FAR”) to implement section 5(b)(i) of Executive Order (“E.O.”) 14030, Climate-Related Financial Risk, requiring government contractors to publicly disclose greenhouse gas (“GHG”) emissions and climate-related financial risk and also set science-based reduction targets.  Non-excepted contractors who do not comply with these rules could be presumed non-responsible and thus ineligible to receive federal awards.

Overview

Under the proposed rule, contractors will need to represent whether they are a “major contractor” (over $50M in federal contract obligations in prior Federal fiscal year) or a “significant contractor” (between $7.5M and $50M in federal contract obligations in prior fiscal year).  If the contractor meets either of those definitions, they then must complete a GHG analysis and report their findings in SAM.gov.  Importantly, the Proposed Rule does not include an exception for commercial items (including COTS items) or services contractors.

The baseline reporting requirement consists of completing the GHG Protocol Corporate Accounting and Reporting Standard, which involves assessing (1) GHG emissions from sources that are owned or controlled by the reporting company (i.e., Scope 1 emissions) and (2) 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 (i.e., Scope 2 emissions). 

Major contractors must also complete an annual disclosure questionnaire through the CDP Climate Change Questionnaire.  This annual disclosure requires accounting for emissions that result from the operations of the reporting entity and that occur at sources other than those owned or controlled by the entity (i.e., Scope 3 emissions).  Additionally, major contractors would need to develop a science-based target to reduce GHG consistent with the goals of the Paris Agreement.  The disclosure and the target must be made publicly available online.  Among other limited exceptions, major and significant contractors that are higher educational institutions or nonprofits are not required to complete an annual climate disclosure or set science-based targets. Notably, however, a major contractor considered a small business for the North American Industry Classification System (“NAICS”) code it has identified in its SAM.gov registration as its primary NAICS code would be exempt from the Scope 3 reporting and target requirements, but must still comply with the Scope 1 and 2 reporting requirements.

Failure to conduct the GHG inventory, make the annual climate disclosures, or meet the science-based targets, if required, would result in a presumption of non-responsibility under FAR subpart 9.1.  Such contractors would presumptively be ineligible to receive contracts or subcontracts through the federal government unless the contracting officer determines that (1) noncompliance resulted from circumstances properly beyond the prospective contractor’s control; (2) the prospective contractor has provided sufficient documentation that demonstrates substantial efforts to comply; and (3) the prospective contractor has made a public commitment to comply as soon as possible on a publicly accessible website (within one year).

Implementation of Rule

The Acquisition Environmental and Contract Management Team is reviewing over 38,000 public comments on the Proposed Rule and drafting the final rule.  A date for release of the final rule has not been made public.  One year after the Proposed Rule is finalized, major contractors and significant contractors will be required to complete their GHG inventories and disclose their emissions in SAM.gov.  Additionally, major contractors will be required to submit their disclosure questionnaire and science-based targets two years after the rule’s implementation.  The Proposed Rule provides waiver authority to an agency in the event of an emergency, for national security reasons, or to allow an additional year for an entity to achieve compliance.  Although it is possible that agencies will grant waivers in the event contractors experience difficulty implementing this rule, agencies have less readily granted waivers of FAR compliance requirements in certain situations, particularly where, as here, the waivers are made public.

Changes may certainly be made to the Proposed Rule before it is finalized.  However, as it is currently drafted, this Proposed Rule would impose potentially significant new reporting and disclosure standards for many government contractors, resulting in increased compliance burden and cost, including cost to the government under cost-type contracts.  For instance, the rule goes further than many companies’ standard climate pledges and even beyond the climate disclosure rules proposed by the Securities and Exchange Commission in March 2022 (as previously discussed here, which would not require companies to develop targets, like the proposed FAR amendments).  Additionally, this rule suffers from a familiar frustration with assessing GHG emissions as it lacks clear guidance on the particular methods and factors that should be used by companies in calculating their emissions.  This lack of a clear framework is particularly concerning in the context of government contracting, where companies will be expected to certify to the results of their GHG emission assessments.  Therefore, as we move toward a final rule, government contractors would be well advised to continue monitoring the progress of this Proposed Rule.