In accordance with the Biden administration's Federal Sustainability Plan, on November 14, 2022, President Biden proposed the . The goal of the proposal, as described by the administration, is to advance government-wide policies aimed at reducing greenhouse gas (GHG) emissions and to protect the federal government's supply chains from climate-related risks.
With echoes of the controversial Securities and Exchange Commission rule on GHG Reporting and Disclosures, this rule requires federal contractors to publicly disclose Scope 1, Scope 2, and "relevant categories" of Scope 3 emissions, depending on the size of the contractor. As described in 2022 guidance from the U.S. Environmental Protection Agency, Scope 1 greenhouse gas emissions include direct emissions from sources owned or controlled by the reporting entity. Scope 2 emissions are indirect emissions associated with the purchase of electricity, steam, heating, or cooling. The relevant categories of Scope 3 emissions include those resulting from the operations of the reporting entity that occur at sources not owned or controlled by the entity. This includes indirect upstream and downstream emissions that occur in the value chain of the reporting company. Upstream emissions are indirect GHG emissions related to purchased or acquired goods and services, while downstream emissions are indirect GHG emissions related to sold goods and services. The GHG Protocol Corporate Accounting and Reporting Standard describes how to complete a compressive GHG inventory for Scope 1, Scope 2, and relevant categories of Scope 3 emissions.
This rule also requires "major" federal contractors to disclose climate-related financial risks and set science-based emissions reduction targets. The annual climate disclosures align with the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations for climate-related financial disclosures. Importantly, the science-based targets must be validated by the Science Based Targets Initiative (SBTi).
Furthermore, the rule's proposed mandate disclosure requirements depend on the size of the federal contractor. These categories are (1) "major" contractors and (2) "significant" contractors. "Major" federal contractors are entities receiving more than $50 million in annual contracts. They must comply with the following requirements under the proposed rule:
- Public disclosure of Scope 1 emissions;
- Public disclosure of Scope 2 emissions;
- Public disclosure of relevant categories of Scope 3;
- Disclosure of climate-related financial risks; and
- Set science-based emissions reduction targets
"Significant" contractors are entities with more than $7.5 million, but less than $50 million, in annual contracts; they would have to comply only with the following requirements:
- Public disclosure of Scope 1 emissions; and
- Public disclosure of Scope 2 emissions
Federal contractors with less than $7.5 million in annual contracts are exempt from this rule. According to data from the Federal Procurement Data System (FPDS) for 2021, approximately 4,413 entities qualify as "significant" contractors, 64% of which are estimated to be small businesses, and approximately 1,353 entities qualify as "major" contractors, 29% of which are estimated to be small businesses.
Currently, only 31% of "major" contractors and 10% of "significant" contractors disclose their GHG emissions through SAM. Thus, this proposed rule poses potential issues regarding emissions data collection for entities without collection systems in place, as well as issues that will most certainly arise if companies do not fulfill reporting requirements.
The 60-day public comment period for this proposed rule is scheduled to close on January 13, 2023. This rule is the first in what the administration has promised will be a number of climate-focused rules impacting government contractors. It is essential that industry weigh in on many aspects of the proposal. For instance, the triggering thresholds are based on "annual contracts." Will that be interpreted to mean solely the value of prime contracts? Will the definition of value include actual value or anticipated value? Resolution of these questions, among others, would materially impact whether a contractor may be covered by the proposed rule. Moreover, will a contractor be required to obtain information from third parties as it pertains to potential indirect Scope 3 emissions?
The proposed rule clearly creates an enormous new compliance burden for federal contractors, which may not be practical or possible, in some instances. Accordingly, we encourage federal contractors to closely review this rule and to submit comments on its standards and requirements.
*The authors would like to thank Emily Marcy, a Law Clerk in Venable's Washington, DC office, for her assistance in writing this alert.