Elements of the Proposed Climate Risk and Resilience Rule for Contractors

Clean energy initiatives, funding and polices are increasing throughout the federal government as a result of the Biden administration’s push to address global and domestic climate calamities. In December 2021, the administration issued Executive Order (EO) 14057 putting into play a federal sustainability pathway and plan to reduce greenhouse gas (GHG) emissions and slow climate change. Specifically, the sustainability plan outlines goals of net-zero emissions buildings by 2045, net-zero emissions operations by 2050, and net-zero emissions procurement by 2050.

In response to the EO, the Disclosure of Greenhouse Gas Emissions and Climate-Related Financial Risk rule was issued last week on the Federal Register, and proposes amending the Federal Acquisition Regulation (FAR) to require federal contractors to report and reduce greenhouse gas emissions.

According to the White House announcement on the rule, the proposed requirements would cover an estimated 85% of emissions associated with the federal supply chain, which is estimated to be double that of the emissions stemming from federal buildings and vehicles.

If published, the rule directs select federal contractors, based on annual federal obligations, to align Scope 1, Scope 2 and parts of Scope 3 emissions with GHG Protocol Corporate Standards, report on financial climate risks per recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), and develop emission reduction targets approved by the Science Based Targets Initiative (SBTi).

The below chart summarizes the federal contractors and requirements that fall under the rule:

According to the notice, the new procedures would apply to major and significant contractors in all commercial products (including commercial-off-the-shelf goods) and commercial services acquisitions, including those valued at or below the standard acquisition threshold (SAT).

Exemptions and waivers from the new procedures include:

• An Alaska Native Corporation, a Community Development Corporation, an Indian tribe, a Native Hawaiian Organization, or a Tribally owned concern
• An academic institution
• A nonprofit research organization
• A state or local government
• Contractors deriving 80% or more of annual revenue from a federal management and operations (M&O) contract that is subject to annual site sustainability reporting requirements
• A senior procurement executive may provide a waiver in acquisitions for national security, emergencies, or other mission essential purposes
• A senior procurement executive may provide a waiver for up to one additional calendar year to allow time for compliance

Upon publish of the final rule, contractors must follow the GHG Protocol Corporate Accounting and Reporting Standard and complete a GHG inventory of Scope 1 and Scope 2 emissions within one year. Two years after final rule publish, contractors must inventory relevant Scope 3 emissions and provide annual climate disclosures aligned with TCFD recommendations and updates. Additionally, contractors will be required to develop and validate science-based targets two years after final rule publish.

On the rule’s extent of impact, the notice states that, “Requiring significant and major contractors to publicly disclose their GHG emissions and requiring major contractors to publicly disclose their climate-related financial risk and set science-based reduction targets will give visibility to major annual sources of GHG emissions and climate risks throughout the Federal supply chain and could, in turn, provide insights into the entire U.S. economy.”

The federal government is accepting public comments on the proposed rule through January 13, 2023.

Given that the climate crisis is a major focal point of the Biden Administration, contractors can expect continued attention on environmental reporting requirements. Additionally, environmental governance is expected to play a larger role in some areas of federal bid evaluations as well.