Emissions disclosures for federal contractors: Steps to get ahead

 

While commercial markets continue to grapple with various ESG disclosure regulations, including the U.S. Security and Exchange Commission’s (SEC) newly finalized climate disclosure rule, one area where emissions disclosures may be coming next is federal contracting. As part of its wider strategy to address climate change, the Biden administration has proposed updates to existing federal procurement requirements that would make greenhouse gas (GHG) emissions disclosures part of the evaluation criteria for federal contract awards. These moves are consistent with Executive Order (EO) 14057, Catalyzing Clean Energy Industries and Jobs Through Federal Sustainability,” which in part seeks to:

  1. Procure sustainable products and services across federal operations.
  2. Facilitate climate resilience and GHG emissions reductions through procurement strategies that extend to contractor and embodied emissions
  3. Create policies and procedures to reduce embodied carbon in federally funded construction projects (Federal Buy Clean)

For companies that primarily work in the federal space, these procurement strategy updates represent a potential opportunity to gain an advantage over competitors in a space where small details can make the difference in big awards.

 

“It’s understandable to be hesitant in starting your climate disclosure journey based solely on one administration’s proposed regulations,” said Grant Thornton LLP Head of Public Policy Greg Wallig. “While priorities of administrations differ and change with every election cycle, the increasing momentum around disclosure in jurisdictions throughout the globe creates a growing cost for companies that continue to delay measuring and managing their climate-related disclosures.”

 

Competitors who anticipate market changes beyond the public sector, he added, will get a months- to years-long head start.

 

 

 

Three proposed updates, two missions: reduction and resilience

 

Proposed rules across federal procurement agencies and departmental spending legislation would require varying degrees of climate-related disclosure for existing contractors or require disclosure as part of evaluation and award. GHG emissions disclosures are the common thread included across all proposed evaluation and award changes.

 

 

Governmentwide Acquisition Contracts (GWACs) Alliant 3

 

The draft Alliant 3 request for proposal (RFP) builds upon the U.S. General Services Administration’s (GSA) existing Alliant 2 for multiple-award, indefinite delivery, indefinite-quantity (IDIQ) governmentwide IT solution providers. One of the Alliant 3 draft’s objectives is to enhance environmental and sustainability planning by requiring respondents to demonstrate evidence of ongoing measurement and reduction of energy and environmental impacts through annual GHG emissions and energy management disclosures made on an annual basis via CDP (previously known as the Carbon Disclosure Project) or the contractor’s GWAC website. In this scenario, GHG emissions disclosure and target-setting could become criteria used to evaluate providers for award and acceptance to the Alliant 3 pool, as well as a follow-on Contractor Performance Assessment Rating System (CPARS) evaluation. With the anticipated FY2024 Q3 (late April/May) release of the final RFP, if included, GHG emissions reporting would become a necessity for providers wishing to remain competitive for these 10-year awards.

 

 

Federal Supplier Climate Risks and Resilience Proposed Rule

 

The earliest signals of EO 14057’s goal to facilitate resilience and GHG emissions reductions through procurement strategies came from the Federal Acquisition Regulation’s November 2022 proposed rule. The rule would require federal contractors with at least $7.5 million in annual federal obligations to disclose scope 1 and 2 emissions via CDP. The proposed rule has exemptions for certain entities, e.g., higher education institutions, non-profit research entities, and state and local governments.

 

Contractors with greater than $50 million in annual federal revenue would additionally disclose relevant scope 3 emissions, set emissions targets validated through the Science Based Targets Initiative (SBTi), and assess climate-related financial risks using the Task Force on Climate-Related Financial Disclosures (TCFD) framework. TCFD is now part of the International Sustainability Standards Board (ISSB) and updates to the proposed rule would likely reference the ISSB as the disclosure standard.

 

 

National Defense Authorization Act for Fiscal Year 2024

 

 Sec. 318 of the FY2024 National Defense Authorization Act (NDAA) grants the Secretary of Defense the ability to waive, on a contract-by-contract basis, the prohibition of required GHG emission disclosures to Department of Defense contractors. This would be in cases where GHG emissions disclosures are necessary and directly related to contract performance evaluation. With a growing focus on resilience as part of defense strategy, it is not impossible to imagine situations in which the secretary determines that the emissions footprint of contractors supporting defense activities is critical to both evaluation and award.

 

 

 

The advantage of early adoption

 

“While these changes add a layer of complexity to federal contractors seeking to win new and continue existing contracts, we see these signals as an opportunity to gain competitive advantage,” Wallig said. “Because much of the private market is not yet in scope for various reporting regulations, determining and disclosing your emissions footprint and other climate-related risks and opportunities could likely set your company apart from competitors.”

 

Additionally, administration changes happen quickly, but the amount of time to comply with climate reporting is significant. Companies that have already started or are now starting their GHG emissions inventory management plan may have a leg up on their competitors.

 

“Now is the time to collect your relevant data and begin to publicly disclose information that could add valuable points to your responses in the future,” Wallig added.

 

 

 

What can companies do to prepare

 

To gain an early advantage, consider three key steps for differentiating your company:

  1. Develop a GHG emissions inventory management plan that allows your company to understand emissions sources and prepare complete and accurate reporting of scope 1, 2 and 3 emissions. Creating and executing an inventory management plan using frameworks commonly referenced in draft federal procurement proposals (e.g., the GHG Protocol) can prepare you to disclose your footprint both as part of the award evaluation and during any subsequent post-award evaluation.
  2. Conduct a CDP climate change questionnaire gap assessment to understand the current state of your climate-related disclosures and where gaps need to be closed to fully report on the platform that federal agencies have referenced across multiple proposed disclosure rules. Doing so can have the added benefit of improving your company’s CDP climate change score.
  3. Assess climate-related risks to better understand the impact climate has on your business while meeting the proposed reporting expectations of federal clients. Knowing both climate-related risks and opportunities has the added benefit of supporting your company’s near- and long-term strategy development to identify physical and transition risks posed to your business by climate change as well as opportunities to add value. 
 

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