The world’s largest purchaser of goods and services, the U.S. federal government, has published a proposal for a new Federal Supplier Climate Risks and Resilience Rule that would require major and significant federal contractors to establish supply chain environmental, social, and governance (ESG) reporting processes. This move aims to reduce the financial and supply chain disruption risks the federal government faces by strengthening vulnerable supply chains, resulting in greater efficiencies and reduced climate risk.
Let’s take a closer look at what this proposal means for federal contractors.
New Public Greenhouse Gas Reporting Requirements
This new ruling will make greenhouse gas (GHG) reporting mandatory and public for federal contractors of a certain size: “significant” contractors receive $7.5–$50 million USD in annual contracts and “major” contractors receive more than $50 million USD in annual contracts.
Major contractors will be required to follow GHG Protocol Corporate Standard through the CDP climate change disclosure process for their scope one, scope two, and relevant scope three (supply chain) emissions.
Significant contractors will be required to follow the GHG Protocol Corporate Standard, but only for scope one and two emissions. Supply chain emissions do not need to be included in reports.
For some federal contractors, this regulation would mark the first time that they publicly disclose their carbon footprint.
New Climate Risk Assessment Disclosures
Major contractors will also be required to complete a climate risk assessment that aligns with recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD). The TCFD outlines core elements of climate-related financial disclosures, including metrics, targets, and strategy. Learn more about the recommendations here.
Significant contractors do not have an obligation to complete climate risk assessments.
New Emission Reduction Targets
Finally, major contractors will be required to set emission reduction targets that are validated by the Science Based Targets Initiative. This process ensures that emissions targets are on track to meet the goals of the Paris Agreement.
Significant contractors do not have an obligation to set emission reduction targets.
|GHG Reporting Requirement||Climate Risk Assessment Requirement||Emission Reduction Target Requirement|
|Major Contractors||Scope one, two, and three||Yes||Yes|
|Significant Contractors||Scope one and two||No||No|
Not sure where to start? Check out Assent’s guide, Four Steps to Create an ESG Program for Manufacturers. You’ll learn how to kickstart a program and get it up to speed quickly.
What Are the Challenges?
Businesses will face numerous challenges as a result of this proposal. Namely, the complexity of launching an ESG program with GHG reporting for scopes one, two, and three.
Businesses without a sustainability program already in place will need to implement a solution quickly. Those with low-maturity ESG programs that aren’t capturing all the climate risk and emissions data required under the new Federal Supplier Climate Risks and Resilience Rule will need to grow their program to capture scope three emissions. Many in-house ESG programs do not include scope three emissions, which were not typically covered by legal requirements until now.
Scope three emissions are considered one of the most difficult to track and report, as they take place in the supply chain rather than within the four walls of the business. The information won’t be stored in operational records, like scope one and two emissions. To capture this data, major contractors will need a supply chain sustainability management solution, like Assent’s ESG solution, to collect scope three emission data from key suppliers.
According to the GHG Protocol Corporate Standard, relevant scope three emissions:
- Are large relative to a company’s scope one or two emissions
- Contribute to the company’s GHG risk exposure
- Are deemed critical by stakeholders
- Have potential emission reductions that could be undertaken by the company
Assent’s ESG reporting solution includes emission surveys that align with the CDP standard, including tools to help assess if your suppliers are already publicly disclosing their carbon emissions. Learn more about our solution here.
What Are the Risks?
Once the public comment period closes on February 13, 2023 businesses will have more information about the requirements and risks of non-compliance. Failure to meet disclosure requirements is expected to result in loss of contract. Note that the comment period was originally planned to end on January 13, 2023 but was extended to February.
There are also risks present when disclosing emission data if you don’t have an ESG reporting program in place, including the challenges of collecting scope three emission data from your supply chain. An emissions disclosure that is not defensible or complete could invite increased government scrutiny.
Federal contractors will need to determine which category they belong to, and then assess the strength of their current climate sustainability programs:
- If you aren’t currently collecting GHG data, you will need to establish a process for collecting scope one and two data from your operations.
- If you are a major contractor, you will need a supply chain sustainability program for collecting scope three emissions.
- Major contractors should use their scope one, two, and three emissions data to begin setting science-based reduction targets.
- Based on timelines in the final ruling, major contractors should begin the process for a climate-risk assessment.
Contact Assent to discover how you can start collecting data on your supply chain scope three emissions.