As noted in our COP27 recap, this year’s climate summit in Sharm el-Sheik involved both the historic creation of a fund to compensate countries most impacted by climate change, as well as lost opportunities to adopt more ambitious and accelerated climate mitigation commitments. Perhaps hidden between these headlines, President Biden announced an initiative with significant implications for federal contractors. Under this proposal, the United States would become the first country to require major government suppliers and contractors to set science-based emissions reduction targets aligned with the Paris Agreement. It would also require contractors to disclose their greenhouse gas (GHG) emissions and climate risks.
This initiative—the proposed Federal Supplier Climate Risks and Resilience Rule—would have wide-reaching impacts if ultimately finalized. Collectively, the proposed rule would cover about 86 percent of the federal government’s supply chain GHG impacts and 86 percent of federal annual spending. To put this in perspective, in the last fiscal year alone the United States purchased $630 billion in goods and services.
The comment period for the proposed Federal Supplier Climate Risks and Resilience Rule closes on January 13, 2023. The proposed compliance requirements for major contractors would start two years after publication of a final rule. If promulgated, this rule may be challenged in court along the lines of the Biden Administration’s COVID-19 vaccine mandate for federal contractors.
I. Overview of the Proposed Rule
Formally, this proposed rule is an update to the Federal Acquisition Regulation, which governs procurement by all executive agencies, and is jointly issued by the Department of Defense, the General Services Administration (GSA), and the National Aeronautics and Space Administration (NASA). As currently drafted, the proposed rule would impose different obligations depending on the size of the contractor. The largest federal suppliers—i.e., “major” contractors receiving more than $50 million in annual contracts—would be required to: (1) publicly disclose Scope 1, Scope 2, and relevant categories of Scope 3 emissions; (2) disclose climate-related financial risks; and (3) set science-based emissions reduction targets. The first and second requirements would be fulfilled through an annual climate disclosure report. Contractors receiving between $7.5 million and $50 million in annual contracts would only be required to report Scope 1 and Scope 2 emissions, and all other federal contractors would be exempt from disclosures. The proposed rule does not discuss what enforcement mechanisms—if any—could be deployed against a contractor that fails to meet its emissions reduction target.
Certain entities would be exempt from the proposal irrespective of the size of their annual contracts. For instance, tribally owned entities, higher education institutions, nonprofit research entities, state and local governments, and certain management and operating contracts figure to be exempt from the proposed emissions disclosures and science-based target requirements. Additionally, if a major contractor is considered a “small business” according to the North American Industry Classification System (NAICS) code in its System for Award Management (SAM) registration, or if it is a nonprofit organization, then it would not be required to complete an annual climate disclosure or to set science-based targets.
The proposed rule would leverage existing third-party standards and systems, including the Task Force on Climate-related Financial Disclosures (TCFD) Recommendations, the CDP (formerly Carbon Disclosure Project) reporting system, and Science Based Targets Initiative (SBTi) criteria. Below, we provide an overview of the (1) GHG inventory requirement; (2) the annual climate disclosure report; and (3) the science-based target requirement.
1. Greenhouse Gas Inventory
Under the proposed rule, contractors subject to Scope 1 and Scope 2 emissions reporting obligations would be required to complete a GHG inventory of their annual emissions. In conducting this inventory, contractors would be required to follow the GHG Protocol Corporate Accounting and Reporting Standard, the most widely used accounting tool to track corporate GHG emissions. The inventory would catalog emissions during a continuous 12 month period, ending not more than 12 months before the inventory is completed. In conducting this inventory, entities would be able to use the Environmental Protection Agency’s simplified emissions calculator.
2. Annual Climate Disclosure Report
Under the proposed rule, “major” contractors (i.e., those with over $50 million in annual contracts) would also be required to complete an annual climate disclosure. As proposed, these disclosures must align with TCFD recommendations and must include, in addition to Scope 1 and 2 emissions, an inventory of Scope 3 emissions. The report must also describe the entity’s climate risk assessment process and any risks identified through that process. The proposed rule currently contemplates that contractors would be able to fulfill this requirement by completing those portions of the CDP Climate Change Questionnaire that align with the TCFD as identified by CDP
3. Science-Based Target Requirement
As noted above, major contractors would be required to develop science-based targets. The Federal Register notice for the proposed rule defines a science-based target as “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.” According to the proposed rule, these targets must be validated by SBTi and be made publicly available. Though only applying to major contractors, it is estimated that these targets would address 64 percent of federal government spending and approximately 69 percent of supply chain GHG impacts.
II. Related Federal Sustainability Initiatives
The proposed rule fits within two larger Biden Administration initiatives. The first is the President’s Federal Sustainability Plan, which we previously summarized in another blog entry. That plan sets a number of goals, including: 100% carbon-free electricity by 2030, and net-zero emissions in federal government procurements by 2050. To achieve the net-zero-emissions procurement goal, the government previously announced a “Buy Clean Task Force” to prioritize the procurement of low-carbon building materials, such as steel and concrete. The proposed Federal Supplier Climate Risks and Resilience Rule furthers net-zero procurement by requiring 85 percent of the emissions associated with the Federal supply chain to set net-zero targets and disclose their emissions.
The second initiative is a “comprehensive, government-wide strategy to measure, disclose, manage, and mitigate the systemic risks” of climate change. Within this bucket, the Biden Administration points to the Department of Labor’s proposal to remove barriers to the consideration of climate risks and other environmental, social and governance factors by ERISA plan fiduciaries; the Securities and Exchange Commissions’ pending proposal to require GHG disclosures for public companies; and the efforts of the Financial Stability Oversight Council to study climate-related risks to the financial system.
 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.
 Scope 3 emissions are a consequence of the operations of the reporting entity but occur at sources other than those owned or controlled by the entity.