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Thousands of Government Contractors to Start Reporting Emissions and Climate Risks
by Per Thastrom
Companies who realize emission efficiencies will be doubly advantaged as they bring down their own costs and can potentially charge a premium for their services
By proposing to amend the Federal Acquisition Regulation (FAR) the current Administration is set to accelerate an already strong private sector trend in Greenhouse Gas (GHG) and climate disclosures. The requirements are similar to the SEC Climate Disclosure proposal (FI Whitepaper), but actually go further in requiring science-based target setting and being prescriptive on the use of the CDP Climate Change Questionnaire. The Federal Government has identified almost 6,000 contractors as being in scope for the new disclosure rules.
Who Is Impacted and What Will Be Required?
The proposal was unveiled on November 10th 2022 and the comment period is set to run until January 13th 2023. Significant ($7.5-50 million in contracts) and major (more than $50 million in contracts) contractors will have one year after the publication of the final rule to disclose their Scope 1 (from sources that are owned or controlled by the entity) and Scope 2 (from generation of purchased energy) emissions. Major contractors would then get an additional year to disclose Scope 3 emissions (from operations of the entity but occurring at sources not owned or controlled by the entity), conduct a climate risk assessment aligned with the Task Force on Climate-Related Financial Disclosures (TCFD) standard, complete the CDP Climate Change Questionnaire and commit to develop and obtain Science-Based Target initiative (SBTi) validated targets.
| Contractor type | GHG inventory | Annual climate disclosure | Science-based targets |
| Significant ($7.5-50 mill. in contracts) | Scope 1 and 2 as per GHG protocol within a year | No | No |
| Major (>50 mill. in contracts) | Scope 1 and 2 as per GHG protocol within a year; Scope 3 as per GHG protocol within two years | Yes, TCFD standard and CDP Climate Change Questionnaire within two years | Yes, SBTi validated within two years |
Process Complexities
While it is conceptually straightforward, and detailed guidance is provided by the GHG Protocol, to calculate Scope 1 and Scope 2 emissions there is nonetheless complexity in identifying data sources and productionalizing the calculations. Scope 3 is significantly more complex as it concerns emissions generated outside of the entity by a multitude of different types of stakeholders in the value chain, upstream and downstream. If the emissions estimates are to withstand scrutiny, then a robust design, implementation and ongoing execution will be needed. Work should begin on this as soon as possible, especially as this will inform the science-based targets.
Key Inputs
The TCFD standard is characterized by emphasizing both risk and opportunity in its approach to strategic planning and risk management and how it seeks to translate these to financial impacts. For example, TCFD encourages users to recognize that efficient use of resources may result in both costs savings and reduced supply chain risks. TCFD is a broad framework with metrics and targets at its core, encompassed by risk management, strategy, and governance. However, it is more principle based than prescriptive.
The CDP Climate Change Questionnaire supplements the TCFD by offering up a single structure for disclosing the companies’ implementation of TCFD. Similarly, the SBTi provides a prescriptive framework for setting the targets at the core of the TCFD. A science-based target is a target for reducing GHG emissions that is aligned with the goals of the Paris Agreement to limit global warming to 1.5 degrees centigrade above pre-industrial levels. The FAR proposal additionally requires the targets to be validated by the SBTi.
Motivating Factors
The key motivating factors behind the proposal are:
- Reducing supply chain vulnerabilities, e.g. enable the Government to understand how and when the risks faced by contractors may impact the agencies’ own missions
- Aligning targets to address climate change, e.g. enabling the Government to achieve its net zero goal by 2050 goal
- Improving transparency, accountability and ability to collaborate with suppliers, e.g. enable the government to hone in on emission hot-spots and potentially reduce spend on contractors with the largest contributions
- Increasing efficiency of disclosure via standardization, e.g., simplify and streamline the creation and reporting of those disclosures
- Identifying areas for increased efficiency and reduced risks, e.g. encouraging companies to identify opportunities and manage their climate-related risks and opportunities
Risks and Opportunities
This exercise will yield insights into how disclosures may be used in the procurement process and allow contractors to better position themselves. Contractors whose production is onshore, near-shore of “friend-shore” may get preferential treatment over contractors with more exposed supply chains. The government may, as it optimizes its procurements to meet net-zero targets, include emissions as a decision factor in their bid reviews. There may be instances where the government may choose a higher priced proposal due to the desire to lower the GHG footprint to meet its own emissions goals. Companies who are able to realize efficiencies will thus be at a dual advantage as they bring down their own costs and are able to charge a premium for their products and services.
Are you interested in discussing the potential impact of the new FAR climate amendments? Email contact@ficonsulting.com or call us at 571.255.6900.
