While Government contractors are well-acquainted with federal compliance rules and regulations like the Federal Acquisition Regulation (FAR), a recent proposal from the Biden-Harris Administration to require contractors to track and report their greenhouse gas emissions and climate-related financial risks represents a significant amendment that requires deeper inspection. In this article, MorganFranklin Government Contracting and ESG Service leads discuss the proposed regulation and its intended impacts, while providing background on the importance of greenhouse gas emissions within the context of climate change.
Climate Risks and Resilience Proposed Rule – What You Need To Know
From the outset, the Biden-Harris Administration made it a public priority to address climate change, taking actions such as rejoining the Paris Accord and participating in Conference of Parties (COP) events in the UK and Egypt. In 2021, President Biden vowed to reduce U.S. emissions by at least 50% by 2030. Late in 2022, the Administration proposed the Federal Supplier Climate Risks and Resilience Rule. This proposed rule requires contractors to provide both quantitative and qualitative information to the federal government, leveraging the guidelines of three well-known corporate climate change frameworks:
- The Task Force for Climate-Related Financial Disclosures (TCFD)
- The GHG Protocol Corporate Standard
- The Science Basted Targets Initiative
In short, contractors meeting certain obligation thresholds would need to capture data related to emissions and report those emissions in relation to their established emissions targets as outlined in the table below:
For major contractors, this represents a significant undertaking, as the data required to calculate emissions across a firm’s value chain may be difficult to stitch together. The public comment period for this proposed rule closed on February 13, 2023. Now, savvy contractors will be taking steps to prepare while awaiting to see what changes (if any) are made to the final rule.
Climate Change and GHG Emissions
Government contractors are no strangers to acronyms, this one proposed rule references a few standards and frameworks that many may be unfamiliar with. First, let’s unpack GHG or “greenhouse gas emissions.” Here is a quick primer on Scope 1, 2, and 3 emission types. As shown in the figure below, Scope 1 GHG emissions are those that are released directly by a company due to combustion operations such as vehicles burning fuel. Scope 2 GHG emissions are those released through power generation and tracked via the electricity purchased by the company. Finally, Scope 3 emissions are those indirect emissions related to the supply chain of materials consumed as well as the downstream effects of sold products and services, including disposal after customer usage. The GHG protocol covers reporting of six greenhouse gases: CO2, CH4, N2O, hydro fluorocarbons (HFCs), per fluorocarbons (PFCs), sulfur hexafluoride (SF6).
To calculate emissions, companies typically leverage purchasing data for fuel and utilities in scope 1 and scope 2 categories, respectively. To calculate scope 3, there are a few different ways to estimate the emissions that are generated through the supply chain from raw material sourcing to manufacturing to product use and disposal. Typically, a life cycle assessment of a physical product is a useful tool to understand the emissions contained within the physical product. The US EPA Center for Corporate Climate Leadership offers advice and tools for estimating scope 3 emissions across a company’s value chain.
First Steps To Prepare for Climate Reporting
While the final rule and amendment to the FAR is not expected until the Summer of 2023, there are some critical steps to take if you are a government contractor leader. This trend is not limited to the United States. Climate disclosure regulations are rolling out in countries across the world. In fact, Canada announced requirements for its largest suppliers that took effect on April 1, 2023.
- Evaluate your annual obligations and growth strategy to determine which rules will apply in 2024 and beyond
- Invest in education for finance, accounting, and legal staff to understand the various frameworks and standards which will apply
- Perform peer benchmarking to understand what competitors are disclosing publicly to ensure your company stays competitive
- While initial GHG inventories can be collected and reported in Excel using the GHG Protocol Corporate Standard and EPA emissions factors, evaluate whether an investment into a carbon accounting technology platform (such as Persefoni) is worthwhile
Internal Controls Considerations
To ensure the integrity of reporting, companies should adhere to principles of data quality, the accuracy of calculation, and monitoring. Quantitative disclosures must be based on reliable inputs and subject to appropriate internal control. Metrics presented externally should be calculated accurately and supported through management books and records. Internal controls and disclosures should be reviewed in accordance with company protocols by the monitoring function, such as the internal audit, disclosure committee, or audit committee. This ongoing review and monitoring process helps to maintain the accuracy and reliability of financial reporting and ensures that any issues are promptly identified and addressed. Additional focus should be given to internal controls around accurately capturing information around non-financial reporting such as carbon emissions data.
Government Contractors can be both efficient and compliant by establishing streamlined processes and procedures and integrating appropriate systems to remain compliant with the newest regulations. By taking a proactive approach to drafting policies, implementing processes and constant monitoring, companies can mitigate risk and maximize cost recoverability.
How MorganFranklin Can help?
The MorganFranklin Government Contracts Advisory and ESG Advisory practices assist clients to address all of the above. From drafting, reviewing and updating policies and procedures, implementing systems, and developing change management strategies our teams are here to ensure overall success. We have a portfolio of Subject Matter Experts, most with over 20 years of relevant experience including former DCAA auditors, Industry and Consultancy experience ready to help you solve the most complex problems when contracting with the Federal Government.
Authored by: Andrew Rizkallah, Jose Soto, and Nikhil Gandhi