The Federal Acquisition Regulatory Council (FAR Council) on Nov. 14, 2022, released a sweeping proposed regulation concerning greenhouse gas reporting requirements titled “Federal Acquisition Regulation: Disclosure of Greenhouse Gas Emissions and Climate-Related Financial Risk.”
As it is written now, the proposed rule has significant implications for companies with more than $7.5 million in annual contracts from the federal government and will require disclosures and establish a new responsibility standard under FAR Part 9.1. The FAR clauses for this criterion will be required in all contracts except for contracts for supplies that will be “delivered” outside the U.S. or contracts for services that will be performed outside the U.S.
Broadly, the proposed rule divides up responsibilities between “significant contractors” and “major contractors.” Significant contractors are those who obtained at least $7.5 million (and no more than $50 million) in federal contracts the previous fiscal year, while major contractors are those who obtained at least $50 million in contracts the previous year. The rule appears to limit those numbers to direct federal obligations and not indirect through prime contractors and higher-tiered subcontractors (though when a company is a subcontractor, there could be a reporting requirement up through the supply chain).
As explained further below, significant contractors would be required to disclose Scope 1 and Scope 2 greenhouse gas emissions, and major contractors would have those requirements in addition to Scope 3 greenhouse gas emission disclosures and provide science-based greenhouse gas emission reduction targets.
In order for any company covered by this requirement to be deemed a responsible contractor and eligible to receive contracts, it must inventory its greenhouse gas emissions in the System for Acquisition Management (SAM). This must be done through its immediate owner or highest-level owner, meaning that subsidiaries would likely have to report through a parent company. Major contractors must also, in order to be deemed responsible, fill out and publish (on a public website) the CDP Climate Change Questionnaire, which includes targets to reduce emissions.
The proposed rule defines an immediate owner consistent with FAR 52.204-17 and FAR 52.212-3. Both define an “immediate owner” as one having “direct control” of the offeror. Further, highest-level owner is the entity that “owns or controls an immediate owner of the offeror, or that owns or controls one or more entities that control an immediate owner of the offeror.”
Responsibility is a go/no-go proposition. To the extent a contractor is not responsible, it is not eligible for federal contracts.
Scope 1 and 2 Emission Disclosures Required by Significant and Major Contractors
Significant contractors will have to disclose Scopes 1 and 2 greenhouse gas emissions. These greenhouse gas emissions include “carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, nitrogen trifluoride, and sulfur hexafluoride.”
Scope 1 greenhouse gas emissions include emissions that come from facilities that are owned and controlled by the “reporting entity.”
Scope 2 greenhouse gas emissions include 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.” This could put contractors in the difficult position of requiring their utility providers to report greenhouse gas emissions.
When conducting an inventory of greenhouse gas emissions, contractors must utilize the GHG Protocol Corporate Accounting and Reporting Standard.
Additional Requirements for Major Contractors
Major contractors must also: 1) provide reports of Scope 3 emissions, 2) describe their climate risk assessment process, and 3) draft and report science-based emission reduction targets.
Scope 3 Emissions: Scope 3 emissions are that “are a consequence of the operations of the reporting entity but occur at sources other than those owned or controlled by the entity.”
Emissions Targets: Major contractors must also develop emissions reduction targets validated by the Science Based Targets Initiative (SBTi) that are consistent with what is necessary to meet the goals set out in the Paris Climate Accords. These targets will have to have been validated by the SBTi within the past five years.
There are limited exceptions to this rule. They include:
- Alaska Native corporations
- community development corporations
- Native Hawaiian organizations
- Indian tribes
- tribally owned concerns
- higher education institutions
- nonprofit research entities
- state or local governments
- entities that receive 80 percent of their annual revenue from federal management and operating contracts and are already subject to site sustainability reporting requirements
Notably, there are no exceptions for small businesses, commercial products or services, or COTS items.
Timeline for Implementation
Contractors will have one year from the publication of the final rule to become compliant with Scope 1 and Scope 2 reporting and certification requirements. Major contractors subject to the additional requirements will have an additional year to become compliant with them.
Holland & Knight will publish additional insight on this topic as events warrant.