How Climate Risk Can Impact Government Suppliers and Servicers

The Biden administration recently released A Roadmap to Build a Climate-Resilient Economy (Roadmap), which lays out a strategy to implement the six lines of work set forth in the administration’s May Executive Order on Climate-Related Financial Risk. One of the lines of work, Using Federal Procurement to Address Climate-Related Financial Risk, is likely to get the attention of firms and companies currently supporting the federal government.

Changes to Procurement Process

In laying out tactical steps to carry out changes to the federal procurement process that will address climate-related financial risk, Biden’s Roadmap highlights two proposed amendments to the Federal Acquisition Regulations (FAR). These amendments were introduced in May of 2021, and it is expected that it will take 18 months to fully define the resulting changes to the FAR. Currently, suppliers and contractors are generally seeing inclusion of FAR 52.223-22 Public Disclosure of Greenhouse Gas Emissions and Reduction Goals-Representation in solicitations, which consist of two check boxes on whether  the company discloses greenhouse gas emissions or greenhouse gas emissions reduction goals. As the FAR Council (FARC) develops the current amendments, we expect to see this representation replaced with an actual substantive requirement for contractors and suppliers. Potential changes include:

• A requirement that companies with substantial federal contract activities disclose their climate risks and greenhouse gas emissions and establish science-based emissions reduction targets
• A requirement that federal agencies consider climate risks and greenhouse gas emissions in their own procurement decisions, including by giving preference to proposals from suppliers with a lower social cost of greenhouse gas emissions

Considerations For FARC

One of the goals behind these amendments is to enable federal agencies to engage in data-driven decision-making to drive broader change in relation to climate-related financial risk. To achieve that objective, the FARC will need to provide sufficient guidance to suppliers and contractors to ensure that data is reliable, accurate, and calculated consistently across reporting entities.

The FARC also needs to consider that many government suppliers are privately held companies and therefore may not currently track or report on the metrics that are considered for evaluation. As a result, these entities may require additional guidance and/or time must be provided to these suppliers for purposes of consistently capturing greenhouse gas emissions and climate-related financial risk reporting. Other points of consideration include:

• What mechanism will be utilized to gather the evaluated data points? Will companies self-report on an individual procurement basis, or will data points be gathered and monitored in a central repository?
• How will these data points be validated?
• Will there be consistency in terms of what the FARC requires with what is being required of regulated and publicly traded entities?
• Will current vendors and suppliers be required to report on these metrics mid-contract? And if so, could that impact their current contract or option years?
• When it comes to procurement decisions, what weight will be given to these metrics? Will it be handled in a manner similar to socioeconomic status, with contracting set-asides, contracting minimums, and metric targets?

It will be important for the FARC to thoroughly consider the above items and provide clear and consistent guidance to both federal agencies and federal contractors. In considering the forthcoming amendments, the FARC should adopt a similar, tiered timing approach as GSA did with the Alliant contracting vehicle—requiring incremental reporting from contractors each year, allowing organizations to build the capability to track and report on the desired metrics. Ideally, these changes will pave the way for similar requirements and guidelines in state, local, and even commercial procurement activities. In light of the $600 billion per year that the government spends on goods and services, if rolled out effectively, these amendments have the potential to be a significant agent of change.