In an effort to comply with Executive Orders issued by the President, and to lower greenhouse gas effects, the Department of Defense, NASA, and GSA have recently issued a proposed rule that would change the FAR to create further requirements for contractors to report and disclose greenhouse gas emissions, as well as create emission targets. This proposed rule will add various requirements to the FAR that create additional reporting for contractors based on their size. Contractors should review these potential changes carefully, provide comments, and begin preparing for compliance with the new requirements. Below is our summary of the key changes.
On November 14, 2022 the DoD, NASA, and GSA released a proposed rule that aims to help curb climate change and greenhouse gas (“GHG”) effects. According to the proposed rule, climate change risks such as extreme weather, supply chain disruptions, and risks to infrastructure and businesses need to be addressed. As such, the proposed rule states that it is important for the United States’ focus to shift from carbon intensive energy, to decarbonized climate-resilient economies, as that will increase the United States’ competitiveness and economic growth. The proposed rule also purports to be issued in accordance with President Biden’s May 20, 2021, Executive Order 14030, Climate-Related Financial Risk, which asked for Agencies to consider amending the FAR to “require major Federal suppliers to publicly disclose greenhouse gas emissions,” address climate-related financial risk, set science-based reduction targets, and ensure Federal procurements minimize climate risks.
Categories of Contractors
The Proposed Rule hopes to meet the aims of the Executive Order by creating a new FAR subpart at 23.XX that will be titled “Public Disclosure of Climate Information”. The new FAR subpart will expand on the solicitation representation provisions found at FAR 52.223-22, and 52.212-3, while establishing a new standard of responsibility for certain contractors according to FAR 9.1. This new FAR subpart will apply to two categories of “major Federal suppliers” or contractors, called “significant contractors” and “major contractors”.
A “significant contractor” is considered to be a contractor who has received $7.5 million or more, but not more than $50 million in Federal contract obligations in the prior Federal fiscal year. A “major contractor” is defined as a contractor who received more than $50 million in contract obligations in the prior federal fiscal year. The Proposed Rule states that about 4,413 businesses would qualify as significant contractors, of which 64% are small businesses, while there are about 1,353 businesses that would qualify as major contractors, of which 29% are small businesses. So, these changes are expected apply to many contractors across the board. These distinctions are important to keep in mind as they will dictate what reporting requirements apply to you as a contractor.
The Proposed Rule states that under the new proposed FAR subpart, a contracting officer is required to treat the two categories of contractors discussed earlier as “non-responsible” if they do not inventory their annual GHG emissions and disclose their total emissions in SAM.gov. In addition, “major contractors” will also be treated as non-responsible unless they have made available on a publicly accessible website, an annual climate disclosure using the CDP Climate Change Questionnaire, and set targets to reduce emissions.
Types of Reporting
The inventories of GHG emissions that both categories of contractors will be required to produce shall include “Scope 1” and “Scope 2” emissions. Scope 1 emissions are GHG emissions from sources that are owned or controlled by the reporting company itself, while Scope 2 emissions are GHG emissions associated with the generation of electricity, heating, and cooling, or steam, when they are purchased or acquired for the reporting company’s own consumption but occur at sources owned or controlled by another company. When compiling Scope 1 and Scope 2 GHG emissions for inventory, contractors will be required to follow the “GHG Protocol Corporate Accounting and Reporting Standard“. The inventories must show emissions during a continuous period of 12 months, and “major contractors” are required to conduct an inventory of “Scope 3” emissions as well. Scope 3 GHG emissions are emissions that are a consequence of the operations of the reporting company but occur at sources other than those owned or controlled by the company. There are additional reporting requirements outside of inventories that major contractors must comply with as well.
Major contractors will also be required to complete an annual climate disclosure and develop “science-based targets” for GHG emissions. For this annual climate disclosure, major contractors would complete it within the major contractor’s current or previous fiscal year. The report would include GHG emission inventories of scope 1, 2 and 3 emissions, as well as a description of the company’s climate risk assessment process and any risks identified. These Annual Climate Disclosures would be based on CDP Climate Change Questionnaires that align with TCFD and must be made available on a publicly accessible website (accessible through the company’s website or the CDP website). For the development of science based targets, the major contractor would develop targets for reducing GHG emissions that are in line with emission reductions that the latest climate science deems necessary to meet the goals of the Paris Agreement to limit global warming to well below 2 degrees Celsius above pre-industrial levels and pursue efforts to limit warming to 1.5 degrees Celsius. To find the most recent climate science for these items, the Proposed Rule states that major contractors should review the 2018 Intergovernmental Panel on Climate Change Special Report. Also, the science based targets set by major contractors need to be validated by SBTi within the previous five calendar years and made available on a publicly accessible website.
The Proposed Rule does seem to provide exceptions to the inventory, reporting, and science based targets if the company is a Tribal or Native American owned company, a higher education institution, nonprofit research entity, a state or local government, or an entity that derives 80 percent or more of its annual revenue from Federal management and operating (“M&O”) contracts that are already subject to agency annual site sustainability reporting requirements. Also, if a “major contractor” is considered a small business for its primary NAICS code or it is a non-profit organization, then it will not be required to complete an annual climate disclosure or set science based targets. However those small business contractors would still be required to complete the inventory of scope 1 and scope 2 emissions and report the total annual emissions in SAM.gov.
As stated, this is a proposed rule, with a lot of new complex requirements placed on a variety of categories of contractors. The agencies proposing this rule realize there is a necessary delay to allow contractors to compile data and determine what items need to be addressed internally. So, starting one year after the publishing of the final rule, the two categories of contractors must have completed the GHG emission inventory and disclosed the total annual scope 1 and 2 emissions. The Proposed Rule states this one-year period should provide the time needed for contractors to become familiar with the new requirements. For “major contractors,” the additional compliance requirements will start two years after publication of the final rule, so that the major contractor can have time to inventory scope 3 GHG emissions, complete risk assessments, complete climate change questionnaires, and develop science based targets.
As you can likely tell by the length of this blog post, this Proposed Rule is quite complex, and presents some large changes to GHG emission reporting for Federal Contractors. This blog post simply reviews the surface level requirements, so we highly recommend you read the proposed rule as it has further details on reports, exemptions, waivers, impacts, and responsibility determinations. When you review the Proposed Rule, keep in mind that the proposed rule calls for comments until January 13, 2023, and has a link to submit formal comments on the Federal Register site. Given the length and depth of the Proposed Rule, it is likely this will lead to many comments, and should provide further clarification. We here at SmallGovCon will keep an eye out for any updates or changes, and as always will keep alerting you to changes in the Federal Contracting industry.
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