FAR Council Proposes Climate Change Policy Including Inventory and Disclosure of Greenhouse Gas Emissions and Science-Based Targets

On Monday, November 14, 2022, the Federal Acquisition Regulation (FAR) Council published in the Federal Register a significant proposed rule that would amend the FAR to require contractors at certain thresholds to disclose greenhouse gas (GHG) emissions, climate related financial risks and science-based targets to reduce emissions, in accordance with Executive Order (EO) 14030. Many elements of the proposed rule echo the Security and Exchange Commission’s (SEC’s) proposed rule on Climate-Related Disclosures that has yet to be finalized. The Council, citing the Fourth National Climate Assessment and the Intergovernmental Panel on Climate Change (IPCC) Sixth Assessment Report, noted that motivations for the proposed rule include “the intensifying impacts of climate change present physical risks, such as increased extreme weather risk leading to supply chain disruptions, and increasing risks to infrastructure, investments and businesses.” By amending the FAR, the Council seeks “to establish a policy to ensure major Federal suppliers make the required disclosures and set targets to reduce their GHG emissions.”

First, the proposed rule would “create a new FAR subpart at 23.XX, entitled ‘Public Disclosure of Climate Information.’” This section would both (i) expand the representations at FAR 52.223-22, Public Disclosure of Climate Information-Representation, and FAR 52.212-3, Offeror Representations and Certifications-Commercial Products and Commercial Services and (ii) establish a new FAR subpart 9.1 responsibility standard for certain thresholds of contractors related to reduction of GHG emissions and disclosure thereof.

The extent to which the proposed representations and responsibility standard apply depend on an entity’s classification as a “significant contractor” or “major contractor” under the proposed rule. A “significant contractor” receives “$7.5 million or more in Federal contract obligations . . . in the prior Federal fiscal year as indicated in the System for Award Management (SAM).” A “major contractor,” on the other hand, receives “more than $50 million in Federal contract obligations . . . in the prior Federal fiscal year as indicated in SAM.”

Responsibility Standard

The proposed FAR amendment would establish a new responsibility standard for significant and major contractors. A contracting officer would be required “to treat a significant or major contractor as nonresponsible,” and therefore ineligible, for contract award, “unless it has (itself or through its immediate owner or highest-level owner) inventoried its annual GHG emissions, and . . . has disclosed its total annual emissions in SAM.” In addition, a major contractor will be considered nonresponsible “unless it has . . . made available on a publicly accessible website an annual climate disclosure that was completed using the CDP Climate Change Questionnaire in its current or previous fiscal year and sets targets to reduce its emissions.”

The proposed rule adopts the meaning of “immediate owner” and “highest-level owner” as those are defined in FAR 52.204-17, Ownership or Control of Offeror, and FAR 52.212-3, Offeror Representations and Certifications-Commercial Products and Commercial Services. An “immediate owner” is “an entity, other than the offeror, that has direct control of the offeror.” The “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.” A significant or major contractor may comply with the proposed new policy through the action of its immediate or highest-level owner, but the significant or major contractor must report its emissions in SAM itself.

GHG Emissions: Inventory and Disclosure

The proposed rule requires significant and major contractors, either through themselves or their immediate or highest-level owner, to “have completed within its current or previous fiscal year a GHG inventory of its annual Scope 1 and Scope 2 emissions.” Consistent with the SEC’s proposed climate disclosure rule, the proposed rule defines greenhouse gases as including “carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, nitrogen trifluoride, and sulfur hexafluoride.” 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.” In preparing GHG inventories, contractors will be required to follow the GHG Protocol Corporate Accounting and Reporting Standard.

In addition to these obligations, major contractors (those receiving more than $50 million in Federal contract obligations) must inventory, and disclose, their Scope 3 emissions. Scope 3 emissions are “emissions that are a consequence of the operations of the reporting entity but occur at sources other than those owned or controlled by the entity.”

A major contractor must complete an annual climate disclosure, which includes (i) the GHG inventory for Scope 1-3 emissions and (ii) a description of the “entity’s climate risk assessment process and any risks identified.” The proposed rule requires major contractors to submit the annual climate disclosure “by completing those portions of the Carbon Disclosure Project’s (CDP) Climate Change Questionnaire. The disclosure must also “be made available on a publicly accessible website,” which the rule clarifies “could be the company’s own website or the CDP website.”

Science-Based Targets

Under the proposed rule, major contractors must also develop science-based targets to reduce GHG emissions and have the target validated by the Science Based Targets Initiative (SBTi). The 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.” Major contractors’ science-based targets SBTi validation must be recent within five calendar years and be publicly accessible, either by being published on SBTi’s website or on another public website.

Exceptions

Some notable exceptions to the proposed rule apply. Among those entities excluded from the requirements to inventory and disclose Scope 1 and 2 emissions and set science-based targets are: (i) Alaska Native Corporations, Community Development Organizations, Indian tribes, Native Hawaiian Organizations, or Tribally owned concerns; (ii) higher education institutions; (iii) nonprofit research entities; (iv) state and local governments; and (v) entities “deriving 80 percent or more of [their] annual revenue from Federal management and operating (M&O) contracts that are subject to agency annual site sustainability reporting requirements.”

Additionally, the proposal excludes major contractors that are considered small businesses for the primary NAICS code identified in its SAM registration or that are nonprofit organizations from the requirement to complete the annual climate disclosure or set science-based targets. These entities are, however, still required to annually inventory their GHG emissions and report the amounts in SAM.

Moreover, the new procedure does not apply to an acquisition listed at FAR 4.1102(a), “where the offeror is exempt from the requirement to be registered in SAM at the time an offer is submitted, since enforcement of the policy at FAR 23.XX03 is accomplished via review of significant or major contractor’s representations in SAM as described in FAR section 23.XX05.” The senior procurement executive may waive the procedures at FAR 23.XX05 for national security or emergency purposes. The senior procurement executive may also provide a waiver not exceeding one calendar year “to enable an entity an additional year to come into compliance.”

Timeline

Recognizing that contractors would need time to comply with the proposed policy, the rule provides that significant contractors must have completed their GHG inventories and disclosures within one year after publication of a final rule. Compliance for major contractors, conversely, is not required until two years following publication of the final rule.

The FAR Council requests submission of public comments on or before January 13, 2023 for consideration in the development of the final rule. Please reach out to your Arnold & Porter team to discuss advocacy to the FAR Council on the proposed rule as well as compliance considerations to start thinking about now to get ahead of these complex new regulations.

© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.